Good Ants in the Pants of the Banking System

Greg Palast

By Gregory Palast for The Observer/Guardian UK

New York, New York, it’s a helluva town. Only 15 years ago, you could walk down Third Street on the Lower East Side and count 23 boarded up buildings, compared with only seven that were inhabited. On the corner at Avenue B, the awnings of the local bank sheltered an open-air market where you could buy smack, crack, angel dust – you name it.

In 1984, one of those dealers (by then, no longer in the business) took over the bank – and heralded a revolution in US finance.

Mary Spink, out of prison after a serving a sentence for running a drugs network, heard that the bank, a branch of Manufacturers Hanover Trust, was about to shut for good and reopen in a swish Midtown location. Manny Hanny was the Lower East Side’s last bank – if you don’t count the loan sharks – and without it, the neighbourhood would finally die.

Spink teamed up with the parish priest and local housing activists (including a former Weather Underground wannabe terrorist) and picketed Manufacturers Hanover’s headquarters in Manhattan. They won a meeting with bank executives, hosted by the Federal Reserve Board.

In the Fed’s elegant Wall Street conference room, the Lower East Side crew demanded that the $80 billion bank hand over its branch building to the group to house a community credit union – and kick in several hundred thousand dollars to get it off the ground. The executives baulked, but the Federal Reserve reminded them of the power of the invisible hand of the marketplace (that is, the iron fist of Alan Greenspan) and the Community Reinvestment Act (CRA), a then-new law obliging banks to serve the credit needs of communities in their areas. Manufacturers Hanover caved in.

The launch of the Lower East Side People’s Federal Credit Union, a novel use of the Act, quietly marked an extraordinary shift in political power from the boardroom to the public.

Today’s monster-sized financial mergers, such as this year’s Citicorp/Travelers Group combination, are akin to elephants mating. It is such a fascinating spectacle that we forget about the effect on the ants below: the poor customers for whom bank consolidation usually means bank abandonment.

Now, in the US, the ants are fighting back with the CRA. Armed with it, America’s anti-poverty campaigners are holding mega-mergers hostage until banks cough up millions, and sometimes billions, of dollars for loan funds pledged to low-income borrowers.

Some 130 angry citizens testified at Federal Reserve Board hearings last March against the takeover of Philadelphia’s CoreStates by First Union Corporation. To avoid further legal challenge, the banks settled with community groups by pledging to make £5bn in low- and moderate-income loans over the next five years, a huge jump over current lending rates.

Then Bank of America made the mother of all pledges: $350bn over 10 years in return for the right to gobble up NationsBank.

In all, merger-bound banks have signed 360 agreements to provide $1.04 trillion in targeted financing to under-served communities. But Matthew Lee isn’t satisfied. Lee, now head of New York’s Community on the Move group, rejected a plea by Citibank and Travelers to end his challenge to their merger in return for the new bank establishing a $115bn 10-year loan programme for poor neighbourhoods.

An alumnus of the Lower East Side People’s credit union, Lee is the Che Guevara of poor folks’ banking rights. Like Che, he sports a beard. Unlike Che, he puts fear into the hearts of American capitalists. His detailed analyses of banks’ lending patterns have exposed the dark, racist side of red-lining – cutting off credit to deteriorating neighbourhoods, thereby accelerating their decline.

Lee wrested a commitment of $1bn for loans to low-income customers from Charter Bank of Ohio after he revealed data showing it was three times more likely to reject loan applications from blacks and Hispanics than from whites, despite little difference in credit-worthiness.

Lee, in rejecting the $115bn offer from Citigroup, emphasised that CRA compliance is not a game of piling up gargantuan loan funds, but a matter of justice for the poor in the provision of credit.

He cites a case of unscrupulous treatment of a black family, the Harrises, by Citigroup’s commercial credit unit. While homeowners in white neighbourhoods can get mortgages at an interest rate of 7 per cent, the Harrises are paying 12 per cent, despite a solid credit rating. The family had signed blank loan forms, counting on the integrity of the world’s largest financial institution.

That was a mistake, one that Lee himself won’t make by signing off on the Citigroup merger deal which, though approved, still faces court review. Lee insists that the Harrises’ predicament is not isolated, and that Citigroup systematically overcharges and underfunds poor communities.

It would be easy to list the CRA’s weaknesses – biased access to capital remains a fact of American life. Nevertheless, it has helped raise the total of home mortgages for black Americans by 72 per cent in the past four years.

The Republicans’ chief banking spokesman claims these loan funds are simply extortion payments to activists. Yet he could not find one banker to testify against CRA’s continuation. No mystery there: banks turn a profit on these low-income loans.

The CRA’s success has not gone unnoticed by Tony Blair’s ‘social exclusion’ experts. In the past few months, the Treasury has sent teams to the US to meet ‘Che’ Lee, community credit union experts and activists, and brought some of them back to London to talk to Government taskforces.

Introducing the Americans to her taskforce last month, Economic Secretary Patricia Hewitt, proclaimed: ‘This Government believes strongly that wider access to financial services – through positive action by the banking community – is vital.’

Imposing a community reinvestment obligation on British banks could revolutionise the credit system. But don’t hold your breath. Hewitt immediately reassured the assembled bankers – the taskforce is headed by the deputy chief executive of Royal Bank of Scotland – that new Labour had no intention of mandating any new lending requirements.

‘I should emphasise that we are not planning to copy the US legislation,’ she said. Rather, she merely hoped that tales of money-making low-income loans in the States would encourage British financiers to seek ‘profitable banking in our poorer communities.’

Back on the no-longer mean streets of the Lower East Side, Mary Spink, dealer-turned-banker (today she’s treasurer of the National Federation of Community Development Credit Unions) warns the Government not to assume it can cajole banks into doing the right thing – voluntarily putting money back into Liverpool instead of into international hedge funds, say.

The Blairites believe they can win the hearts and minds of the banking community with sweet talk of profits from lending to the working poor. But Spink suggests that the CRA succeeds in the US because it obeys the dictum of General William Westmoreland: ‘When you’ve got ’em by the balls, their hearts and minds will follow.’

* * * * *

Gregory Palast’s other investigative reports can be found at www.GregPalast.com where you can also subscribe to Palast’s column.

Gregory Palast’s column “Inside Corporate America” appears fortnightly in the
Observer’s Business section. Nominated Business Writer of the Year (UK Press
Association – 2000), Investigative Story of the Year (Industrial. Society – 1999), Financial Times David Thomas Prize (1998).