The Town That Loved Its Bank By ANDREW MARTIN New York Times June 18, 2010 http://www.nytimes.com/2010/06/20/business/20maywood.html
LIKE many working-class towns in the Midwest, this Chicago suburb has been on the cusp of better times for decades. Separated by a river and woods from its wealthier neighbors, Oak Park and River Forest, it shares some of their charms: imposing, century-old homes and stately elms and maples draping the streets. But Maywood is decidedly more blue-collar than its neighbors, and its residents are predominantly African-American. Most of its homes are modest bungalows and frame houses that were built for factory workers whose jobs disappeared long ago. Many storefronts are vacant, and there appear to be more churches than viable businesses. For more than a decade, a silver-haired banker from River Forest named Michael E. Kelly - owner of Park National Bank in the Chicago area and eight others around the country - took an unusual interest in Maywood. He did things most bankers don't do. In 2003, he opened a branch in Maywood, just west of the city, despite the modest incomes of most of its residents. His bank bought an entire redevelopment bond issue from the village and refinanced it at a lower rate to save Maywood money. And in an effort to prop up property values, he came up with the idea of buying homes out of foreclosure, renovating them and selling them at cost. "He's from River Forest, O.K.?" says Lennel Grace, a fourth-generation Maywood resident. "If you talk to people in River Forest or Oak Park, they say, `Oh, poor Maywood.' They kind of look down their nose. He's not that kind of a person." "He has a true connection and compassion for the community," adds Mr. Grace, who is 60. "He understood that all these communities are linked in one way or another." Last fall, Mr. Kelly's private banking empire collapsed, and his profitable, time-tested playbook as a banker and philanthropist failed amid his own misjudgments and the brutal headwinds of the financial crisis. At the direction of federal regulators, his nine banks were acquired by U.S. Bank, the nation's fifth-largest bank, based in Minneapolis. His banks are among more than 200 that federal regulators have seized in the last three years, many of them small, community institutions. Other banks have acquired most of their assets and deposits, and quietly reopened branches with new signs and little fuss. Across the country, many have bemoaned the loss of locally owned banks, worrying that a faceless national bank will have little interest in a community - aside from making profits. Perhaps nowhere has that issue played out more publicly than in the Chicago area, where Mr. Kelly's Park National Bank was as well known for its philanthropy as for its financial products. Eight months after Park National's closing, anger continues to boil, in part because of the unusual circumstances surrounding its demise. And residents rankle because the federal government decided to bail out megabanks like Citigroup, deemed "too big to fail," while letting a beloved community bank go under. In that context, outrage - and hyperbole - reign. "Basically, it amounts to the largest bank robbery in the history of the United States," says David Pope, the Oak Park Village president. As the new owner of Mr. Kelly's banks, U.S. Bank has become the unwitting lightning rod for local politicians and activists. They demand that the bank, whose parent, U.S. Bancorp, had profits of $2.2 billion on revenue of $16.7 billion last year, curb foreclosures and replicate Mr. Kelly's philanthropy (which involved giving nearly 20 percent of annual profit to causes like education and affordable housing). Indignation erupted on a recent evening at a community meeting on Chicago's West Side, organized by the Coalition to Save Community Banking, a group of activists and ministers. It was clear from the start that the meeting, at Hope Community Advent Christian Church, wouldn't go well for the two attending U.S. Bank executives, Robert V. McGhee and William Fanter, who sat squirming in dark suits at a table set above the crowd on the dais. One speaker, the Rev. Randall Harris, led the audience in a rowdy chant. "U.S. Bank!" he shouted. "Step up!" Others vowed more vigorous protests unless U.S. Bank complied with community demands, which include establishing a $25 million fund to help stave off foreclosures. "We are ready to sit down inside your bank until you take action," said the Rev. Michael Stinson. "It's going to get real ugly before it gets pretty." When Mr. McGhee, a vice president of U.S. Bank, stood to address the crowd, he was interrupted with angry questions and chants. "We are very much aware of the impact Park had on this community," he said. "That is not lost on us. We've taken copious notes." U.S. Bank officials, clearly vexed by a groundswell, say they intend to honor all of Park National's outstanding commitments. But they also say the level of charitable giving will probably decline to match donations in other areas where U.S. Bank has branches. Because of the complexities of the modern mortgage business, the bank also says it has little legal ability to modify local mortgage loans that it did not originate but for which it acts as trustee. "This has involved more public-relations issues than we ever had before," says Richard C. Hartnack, the bank's vice chairman for consumer banking. "We bought 400 branches in California, and it's a much bigger place. That's gone absolutely smoothly." But as he notes, there's a big difference between California and Maywood. In California, he says, "we didn't have the ghost of Mike Kelly to deal with." DESCRIBING Mr. Kelly as a ghost isn't entirely inaccurate. This 65-year-old banker, who is alive and presumably well, is as intensely private as he is generous. In keeping with his past aversion to the news media, he declined to be interviewed for this article. According to Congressional testimony and former colleagues, Mr. Kelly took over the First Bank of Oak Park in 1981, and built it into an enterprise with about $19 billion in assets, largely by buying failed or underperforming banks. He ended up owning nine banks in Texas, California, Arizona and Illinois, all under the umbrella of his bank holding company, the FBOP Corporation. It was the largest privately held bank-holding company in the United States and, before 2008, recorded 25 consecutive years of profits, according to Mr. Kelly's testimony before Congress in January, in a hearing prompted by the closing of his banks. Mr. Kelly's banks were also known for generous charitable donations and a commitment to low-income areas, particularly in the Chicago area. For instance, Park National pledged a $27 million, interest-free construction loan to build a Jesuit preparatory school in Austin, a predominantly African-American neighborhood that abuts Oak Park. Park National also helped to create a community savings center on the West Side of Chicago that provided low- cost banking services and financial counseling to people who normally don't use banks. And it set aside $20 million to help homeowners facing foreclosure. In total, Mr. Kelly's banks donated a total of $36.7 million to charitable causes in 2007 and 2008. FBOP, the holding company, chipped in a further $17 million in those two years, according to his Congressional testimony. FBOP banks also provided $583 million in that two-year span for community development loans, including such things as affordable housing and inner-city redevelopment, he told Congress. "This was the finest community bank in America," says the Rev. Marshall Hatch, a leader in the community banking coalition. "The loss of the bank is incalculable for our side of town." But, of course, Park National is now out of business. So are Mr. Kelly's other eight banks, which were also acquired by U.S. Bank last October. The Federal Deposit Insurance Corporation said the cost of the failures to its insurance fund was $2.5 billion. LEFT in the rubble of that takeover are questions about the viability of Mr. Kelly's altruistic business model and the fairness of the federal government's system for closing down - or saving - ailing banks. Whereas some of the nation's biggest banks nearly collapsed under the weight of risky loans and dubious underwriting, FBOP's big problem, according to Mr. Kelly and his regulators, was that it invested nearly $900 million in what appeared to be sure-thing, blue-chip investments - preferred stock in Fannie Mae and Freddie Mac, the government-sponsored mortgage giants. Those investments were considered so safe, in fact, that government regulators encouraged banks to invest in them. But as the mortgage industry melted down, so did Fannie and Freddie; the government took them over two years ago. Holders of Fannie's and Freddie's preferred securities were out of luck, and the loss left gaping holes in the capital cushion at some of Mr. Kelly's banks. He had other problems, too. For years, he had prospered by scooping up other banks in times of trouble or lending when others pulled back. He followed the same instincts as the mortgage crisis began to go into overdrive, allowing FBOP's banks to expand their loan portfolio by 35 percent between 2007 and 2008. When the credit and real estate markets subsequently fell apart, the deterioration of FBOP's loan portfolio, particularly in commercial real estate, accelerated, federal regulators testified at the January hearing. At the hearing, Mr. Kelly testified that he believed his problems with securing new funding during the mortgage crisis were solved when the government announced the Troubled Asset Relief Program, or TARP, in October 2008. Mr. Kelly said regulators urged him to apply immediately for TARP funds and gave him verbal assurances that his application would be approved. But the first round of TARP money was directed at publicly traded banks, not private entities like FBOP, and Mr. Kelly didn't receive any aid. He testified that a second application for TARP funds stalled as regulators kept changing the criteria. In a story that has gained much notoriety in Chicago, the Treasury secretary, Timothy F. Geithner, awarded a Park National subsidiary $50 million in tax credits on the morning of Oct. 30, 2008, to help the bank finance schools, retail development and a community center on the city's South Side. Later that day, federal regulators closed Mr. Kelly's banks. F.D.I.C. officials said they simply pursued the least costly option for resolving the failed banks, as required by law. "FBOP's business strategy - which had previously been successful - left the bank vulnerable to the perfect storm of events that the FBOP banks could not survive, including unforeseen and devastating G.S.E. losses," testified Jennifer C. Kelly, senior deputy comptroller for the Office of the Comptroller of the Currency, the primary regulator for many of Mr. Kelly's banks. Fannie and Freddie are known as G.S.E.'s, or government- sponsored enterprises. "The determinations to place the FBOP banks into receivership were consistent with, or required by, the statutory scheme Congress put in place," she said. MR. HARTNACK, the U.S. Bank executive, says that his bank has won over customers in the many markets it has entered over the years, and that it eventually will do so here. But he said big banks will never be mistaken for the old corner bank. "It is virtually impossible for a very large company to attain that same level of affection that a community bank has," he says, suggesting that the local banking model has become somewhat antiquated as more consumers bank online. "It's a charming part of our financial history." Mr. Hartnack also points out that FBOP concentrated its donations in the Chicago area. U.S. Bank, he said, tries to spread donations fairly among its more than 3,000 bank offices across the country. As a big publicly traded institution, U.S. Bank also has to consider shareholders who would undoubtedly frown if 20 percent of its profits went to charity. "It's probably reasonable to expect some diminishment in total giving but not reneging on commitments," Mr. Hartnack says of his bank's takeover of FBOP. "We'll gradually not make as many new ones until we get the numbers in balance." U.S. Bank's evolving policy in the Chicago area has created a fair amount of angst, in part because the bank donates 1 to 2 percent of its profits. Besides its donations, the bank provides billions in community lending and investments. Jackie Leavy, a founder of the Coalition to Save Community Banking, said the bank hadn't been transparent in its intentions. For instance, she says, U.S. Bank has taken over and renamed Park National's nonprofit arm, which rehabbed homes and redeveloped blighted areas, but has declined to say how much money it is putting into it. "It's the bob-and-dodge act," Ms. Leavy says. U.S. Bank officials say they are still working out the numbers and don't feel compelled to share news of every donation with community activists. Members of the coalition have also criticized U.S. Bank for what they say is its hands-off policy on housing foreclosures. But the bank is in a difficult situation in that regard, given the structure of the mortgage market. Individual mortgage loans were long ago pooled into bonds and then sold to investors as a means of - in theory - reducing investors' exposure to mortgage losses and therefore allowing banks to underwrite many more mortgages. Neither U.S. Bank nor Park National was a major originator of mortgages in Maywood or the Chicago area. But U.S. Bank is a custodian of bonds containing those mortgages. Bank officials say that as trustee, they have no authority to try to restructure mortgages. But that reasoning has done little to appease critics, who say banks are just passing the buck. Protesters recently rallied against U.S. Bank at a vacant apartment building in Austin, the neighborhood near Oak Park; the bank is trustee for the bonds backed by the property. The back door was ajar, and a pipe in the basement spewed water. The apartments were littered with dog feces and the detritus of past lives: birthday streamers over a doorway, a girl's pink coat on a hook, computer monitors and dishes. "The door is open; sometimes I can hear dogs barking," says Delia Ewing, 84, who lives next door. "I walk in the backyard and see grass taller than I am." Given the circumstances, U.S. Bank officials said they contacted the originator of the mortgage, Wells Fargo, and urged it to board up the building. But U.S. Bank officials say they are dumbfounded that they are being singled out. "We agree that foreclosures are a huge problem," says Steve SaLoutos, executive vice president of U.S. Bank's Midwest division. "It's not a Park National problem, or a U.S. Bank problem, but a national problem." He says it's a frustrating situation for the bank to manage, because it is essentially in the position of cleaning up other people's mistakes. "Do you isolate the bank that is the last one to put a sign on the building?" he asks. U.S. Bank, though, has made some friends in Chicago. At Christ the King Jesuit College Preparatory, the school to which Park National pledged a no-interest loan, the bank is seen as a hero. The school caters to motivated low-income students who agree to work one day a week to cover most of their tuition costs. As the first new Catholic high school on the West Side in 85 years, it owes its existence to Michael Kelly, but when Park National folded last fall, Christ the King's future suddenly looked bleak. "There was so much uncertainty," says the Rev. Christopher J. Devron, the school's president, adding that he "prayed a lot, lost a lot of sleep." He said he eventually approached U.S. Bank to see if it would take over Park National's commitments. U.S. Bank sent a team to the school to meet students, and it eventually decided to substantially match Park National's commitments - not only money but also jobs for students. "You couldn't argue with the value of what the school was doing," says Mr. Hartnack. ON a tour of Maywood, Lennel Grace works through a list of foreclosed homes for which U.S. Bank is either originator, trustee or servicer. At some of the stops, members of the Coalition to Save Community Banking have put signs on the door that read, "Another U.S. Bank foreclosure." Mr. Grace, economic development director at Rock of Ages Baptist Church, says foreclosures have devastated the village, creating dangerous eyesores that have decimated property values. Of the town's roughly 6,800 households, there were 449 new foreclosure filings in Maywood from the beginning of 2009 through the first quarter of 2010, according to the Woodstock Institute, a community development think tank. "This is not a bad neighborhood," he says, pulling onto South 17th Street. "But they are buying these houses for nothing." Mr. Grace and others say they are well aware that U.S. Bank isn't responsible for all the foreclosures. But they also said that by acquiring Park National Bank, U.S. Bank accepted the community's expectations set by Mr. Kelly. At the meeting at Hope church, Mr. Hatch applauded U.S. Bank for making some steps, like investing in schools. But like many others that night, he dispatched with niceties, and threatened to send busloads of protesters to U.S. Bank's headquarters in Minnesota unless it started acting more like Park National. "We have made tremendous progress," he said, turning to the audience. "Because on the West Side we fight back." _______________________________________________ Marxism-Thaxis mailing list Marxism-Thaxis@lists.econ.utah.edu To change your options or unsubscribe go to: http://lists.econ.utah.edu/mailman/listinfo/marxism-thaxis
