Shorebank Now Under Scrutiny by the Feds — Federal Bailout Also Unlikely

In the wake of recent reports that Shorebank’s financial status worsened in the second quarter, some interesting new developments have surfaced.

Yesterday afternoon, Fox Business News reported that Shorebank will now be the target of a federal investigation, to look into whether political pressure was exerted on Wall Street banks to give money to help the troubled Chicago community lending bank reach the monetary threshold needed to allow the bank to qualify for federal TARP funds.

Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (TARP), has said that he will begin looking into whether or not top-level political operatives (e.g., Eugene Ludwig, former comptroller of the currency under President Bill Clinton) and FDIC chief Sheila Bair were involved in exerting direct pressure to force Wall Street banks such as JP Morgan Chase, Goldman Sachs, and others to give money (which now totals more than $150 million) to the ailing bank. Interestingly enough, Shorebank has been involved in raising private capital to qualify for TARP funds despite the fact that Shorebank senior vice president Michelle Collins emphatically stated just last year that Shorebank would take “no TARP money.”

[youtube wwArKKVK7vc]

Although the Obama administration has officially denied any involvement in helping to prop up Shorebank, the rush by other banks to come to its aid has been nothing short of remarkable. More than a few eyebrows have been raised in response to the general flurry of activity shown by other, larger banks seeking to involve themselves in helping to rescue Shorebank.

For example, Lloyd Blankfein, Goldman Sach’s chief executive, was personally involved in making phone calls to encourage other Wall Street banks to inject capital into the the failing Shorebank. This, in a stated effort to allow Goldman Sachs to fulfill its obligations under the 1977 Community Reinvestment Act. (Interestingly, Ron Grzywinski, one of the founders of Shorebank, was the only banker to testify before Congress in favor of the Community Reinvestment Act.)

According to the Financial Times (UK):

John Taylor, the president of the National Community Reinvestment Coalition, said banks such as Goldman were under pressure to “do something good”, especially for a bank widely seen as a “favourite son” of the community banking movement.

The involvement of FDIC chief Sheila Bair is not surprising, given her previously stated appreciation for Shorebank’s founder, Ron Grzywinski. In due time, Barofsky’s investigation should be able to tell us more as to whether or not she was actually more closely involved in trying to bring about a Shorebank rescue.

In a related story, it is looking more and more as if Shorebank may not be able to keep its doors open, after failing to receive a much-anticipated $75 million in federal funds. The approximately $150 million received from Wall Street banks earlier this summer (which has been sitting in an escrow account since that time) will be given back to investors later today unless federal funds are made available or some other solution is proposed.