When Government Is All, Political Connections Are Decisive.

Stephen Spruiell describes the "atypical" way in which the Federal Deposit Insurance Corporation (FDIC) has handled ShoreBank, a Chicago-founded bank with a leftist lending bent. Apparently, "the FDIC relieved ShoreBank of its most toxic assets but left largely intact its management team — a highly unusual move" — and is not requiring an adjustment of its business model. The suspect treatment began in earnest after the Treasury Department said that the bank would have to raise $125 million in private investment to qualify for a TARP bailout:

That was a staggering sum for a bank that, at its zenith, had dared to dream about raising $100 million in a stock offering but was now losing that much money at an annual rate. Not to be underestimated, ShoreBank's network of political patrons, from Illinois Democrats such as Sen. Dick Durbin and Rep. Jan Schakowsky to friends of Bill [Clinton] and buddies of Barack, started suggesting to the biggest players on Wall Street — names like Goldman Sachs, Morgan Stanley, and GE Capital — that they really ought to consider helping ShoreBank. And what do you know? Last May, this who's who of bailout recipients and regulatory targets announced that they couldn't think of a worthier cause. ShoreBank ended up raising nearly $150 million. The banks ponied up most of the money (the Ford and MacArthur Foundations kicked in their share) and placed it in an escrow account, to be invested in ShoreBank upon its receipt of TARP money.

But by then it was too late. The Federal Reserve took another look at ShoreBank's rapidly deteriorating assets and determined that any taxpayer investment in the bank would quickly disappear, never to be paid back. The administration couldn't afford to let the bailout be that explicit, because House Financial Services Committee ranking member Spencer Bachus (R., Ala.) had already fired off a letter demanding to know whether any administration official had played a role in the bank's private-capital raising. That removed TARP from the administration's tool kit, but, having coaxed nearly $150 million out of the private sector, the bank's friends in government found another, less obvious way to save ShoreBank.

The investors created a bank with the different name of Urban Partnership Bank; the FDIC seized ShoreBank and sold it to Urban Partnership at a $368 million loss of its public fund. Moreover, contrary to its rules, the FDIC allowed the cast of characters from the failed bank to take their places in the new bank.

No doubt, many folks believe that ShoreBank's stated mission of giving people on the same degree of concern as profits is a wonderful goal, and worth preserving. But when the model isn't working, red flags should suggest that more people might be harmed than helped. Those flags should all but cover the field when big-government corruption becomes the savior.