Maxine Waters Whacked, Barney Frank Untouched: Jonathan Weil
For all the strange details to emerge in the Maxine Waters bank-bailout scandal, this one might be the most surprising: It turns out members of Congress are prohibited from doing “special favors” for anyone, even if they receive nothing of value in return.
Who knew? Here I had been living under the impression that handing out special favors is something Washington lawmakers do all the time -- be they free pens, tax breaks or earmarks. And, of course, it is.
Yet under the Code of Ethics for Government Service, it is against the rules for any federal employee to “discriminate unfairly by the dispensing of special favors or privileges to anyone, whether for remuneration or not.” That’s what it says in Count III of the ethics charges against Waters, which were unsealed this week by the House Committee on Standards of Official Conduct. The House of Representatives adopted the code in 1958.
The case against Waters, a senior member of the House Financial Services Committee, centers on her efforts in September 2008 to help a troubled Boston lender, OneUnited Bank, land a government bailout. Waters asked Hank Paulson, then the Treasury secretary, for a meeting between Treasury officials and representatives from the National Bankers Association, a lobbying group for minority-owned banks. The meeting was granted. However, the discussion there focused on a single bank, OneUnited.
Husband’s Role
Waters, a California Democrat, didn’t mention to Paulson that her husband owned OneUnited shares worth about $350,000, or that he had been on OneUnited’s board of directors until April 2008. In any event, Treasury officials told OneUnited they couldn’t grant the bank’s initial request for taxpayer money, because they lacked legislative authority to do so.
The favors for OneUnited didn’t stop there. The bank eventually received $12 million under the Treasury’s Troubled Asset Relief Program, in December 2008. That’s because an even more powerful lawmaker intervened, Massachusetts Democrat Barney Frank, the chairman of the Financial Services Committee.
Frank wrote a special provision into the TARP legislation designed specifically for OneUnited. It instructed Treasury to consider assisting banks with less than $1 billion of assets that had suffered severe capital losses on Fannie Mae and Freddie Mac preferred shares. OneUnited incurred more than $50 million of such losses, which wiped out its book value, after the government seized the two mortgage financiers in September 2008. Frank says he also spoke to regulators about OneUnited and asked them to consider it for a cash infusion.
Special Favors
Those look like special favors, too. “I do that frequently when I think it’s good public policy for institutions in the area that I represent, and especially for minority banks,” Frank said in an interview this week.
Later during our phone call, I suggested to Frank that, because the rule barring special favors was written so expansively, perhaps his efforts on OneUnited’s behalf might have fallen under it, too. He agreed this was possible. “I suppose that I might meet that definition, and it’s too broad,” he said. Even something like helping a kid get into Harvard, Frank’s alma mater, could be construed as a violation.
Frank had no financial stake in OneUnited. He said he wanted to help the only black-owned bank in his home state, and that he didn’t think preferred-stock losses on government- chartered Fannie and Freddie should disqualify a bank from receiving TARP money.
Frank Advice
Frank told Waters sometime in September 2008 to stay out of OneUnited’s affairs, because of her husband’s prior board membership, and that he would handle issues related to the bank. However, Waters’ chief of staff continued communicating with OneUnited executives and raising the subject with Frank’s staff, according to the House ethics panel.
The special-favors accusation is only one of the claims against Waters. The other two charges in the ethics panel’s complaint are more substantial: using her office to advocate on a matter in which she had a personal financial interest, and behaving in a manner that brought discredit to the House. Waters has denied the allegations and asked for a full hearing.
Those charges aside, for anyone who’s upset that OneUnited ultimately got a taxpayer bailout, the person to blame for this is Frank. The government sold TARP to the public as a program for healthy banks only. The reason OneUnited wasn’t healthy is it made poor investment decisions. But for Frank’s efforts, the bank would have collapsed.
Undercapitalized Bank
OneUnited’s liabilities exceeded its assets by $6.6 million as of Sept. 30, 2008. It had the lowest regulatory capital ratio of any of the 213 financial institutions that received money under the TARP’s Capital Purchase Program in 2008, according to SNL Financial, a bank-research firm. And it was the only one classified as undercapitalized.
Since receiving its $12 million TARP investment from Treasury, OneUnited has skipped its dividend payments to the government each of the last five quarters. At least it hasn’t failed, though that may be a matter of time.
OneUnited is a classic example of why politics and banking regulation don’t mix. Waters’ actions reek of corruption, while Frank’s smell of pork. OneUnited didn’t deserve special favors from either one of them.
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