On Black Banks

I saw an article recently on Black banks in the US that was filled with inaccuracies. It was a public relations piece for the banking industry, so I thought I would post something based on my 20 years of research experience in the sector.

1. What is the historical significance of Black banks?

They were created at a time when discrimination against Black people was legal in the US. They served as the only financial service providers to the community.

2. Do Black banks have the same level of significance to the Black community today? Why or why not?

No. They are too small to serve the community in any meaningful way. For example, they cannot serve as a line of defense against predatory lending. The result: banks like Wells Fargo are free to target black communities for shoddy loans: http://www.washingtonpost.com/business/economy/former-wells-fargo-loan-officer-testifies-in-baltimore-mortgage-lawsuit/2012/06/12/gJQA6EGtXV_story.html

Some Black banks were trying to help: See:
http://twisri.blogspot.com/2008/03/racial-divide-in-mortgage-mess-carver.html

But most were not. See:
http://twisri.blogspot.com/2009/04/black-owned-bank-has-few-urban-loans.html

This is contrary to their original mission. See:
http://www.creativeinvest.com/research/mlkoninvesting.html

3. What factors contributed to the dwindling in the number of Black-owned banks?

Several factors, but the main one is a lack of vision. Let's face it, though. Greed is a factor, too: "Regulators in October (2008) concluded in a cease-and-desist order that one Black bank had poor standards for qualifying and documenting loans, and gave top executives excessive pay and perks. Two of the perks regulators targeted were a $6.4 million beachfront Santa Monica mansion Cohee used while in California and a Porsche SUV..." 

Really?

4. How would you characterize the experience of Black banks in America throughout their history?

They once served a critical role in Black economic development, but they were sidetracked by the factors listed above. 

5. How did the recent Great Recession impact Black banks?

Decimated most of them.

6. Do you believe Black banking institutions were given a fair shake with regards to the TARP program?

Perhaps, but one Black bank got the most: http://www.washingtonpost.com/wp-dyn/content/article/2010/08/11/AR2010081105561.html

7. What is the forecast for Black banks moving forward?

We will see the number fall to low single digits within 10 years.

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An unprecedented move by the FED

In an unprecedented move, the Federal Reserve tied monetary policy to a specific social metric, an unemployment rate of 6.5%. Given stubbornly high unemployment levels, this new monetary policy target is entirely appropriate. Looks like its working.

Mr. Bernanke appears to be willing to risk his reputation as an inflation fighter in order to lower the unemployment rate. I think the Bernanke Gambit is good news for the unemployed and good news for the country as a whole.

Bernanke signaled that bondholders would no longer dominate monetary policy considerations. This is for their own good, since they will benefit, over the long term, from a fairer and more stable economy.

The majority of American citizens are bond sellers, not bondholders. In a downturn, government spending, required in order to get the economy out of a recession, is financed through the creation, by fiat, of new money. The resulting increase in the quantity of money gives rise to inflation, assuming the quantity of goods remains constant. (“Inflation is always and everywhere a monetary phenomenon.”) Bondholders are impacted primarily, since long term bondholders, those with bonds that mature in, say, ten years, face an increased risk that
the dollars they will receive as interest payments and principal will be worth less than anticipated. Most American I know value day to day social stability more than price increases that may or may not occur at some point in the future.

This is also a nod to the electorate and to political reality. There is no question that, had Romney won, this would not have happened. Romney's monetary policy supported capital owners. Capital owners fear inflation above all else (except a popular revolt by well informed citizens), since the spending power represented by investment cash flows, like those generated by bonds, decline in an inflationary environment.

Our Fully Adjusted Return ® Models show that societal benefits generated by higher employment far outweigh negative impacts of a potentially elevated inflation rate. Our models incorporate the new reality that sustained, high levels of unemployment contribute to social instability in a way we have not seen before. The ability of an
increasingly literate, technologically savvy population to coalesce and act quickly is new. We have seen, in Egypt, Syria, and Libya, the influence that rapidly forming communities have.

In the US, both the Tea Party and the Occupy Wall Street movements reflect this reality. The growing risk of a total breakdown in the ability of the US Government to function in the way that governments must in order to be considered legitimate is the big concern here. In other words, growing income inequality combined with new communication technology that increases the ability of activists to, well, act, have significantly lowered the rationality of traditional monetary policy targets and heightened the risk that normal economic policy mechanisms will fail. This is why the Fed has turned to unconventional monetary policy tools, like Quantitative Easing. Unemployment targeting is simply an acknowledgement and extension of this work.

This may also be a contributing factor to Germany’s recently announced move to reclaim and repatriate $36 billion in gold reserves. As the political side of the US Government fails to anticipate and manage risks associated with growing income inequality, the monetary side of the government finds itself unable to manage policy in a rational way. Hence the growing risk of default. If the US Government defaults on its debt, creditors could try to seize assets, including gold reserves belonging to others but held in the US. The risk that an extremist domestic political faction might support these efforts, previously unthinkable, has also grown. The sensible thing for any foreign government to do  in anticipation of  this situation is to reclaim their assets, quickly and quietly, using whatever excuse they need to do so. Thus, Germany’s recent  action.

That the unemployment rate has become the primary measure used to evaluate the effectiveness of monetary policy is significant. It sends a strong, unmistakable signal to corporations and investors that if they want to protect the value of their investments, they better start hiring. They can start by using some of the cash they have been hoarding, created by falling real wages and increasing productivity, resulting in record profits. This means that they, and the wealthy, now have one more incentive to drive the unemployment rate down. It also signals to politicians that if they want to protect wealthy contributors, they should solve the fiscal crisis now, since the
crisis threatens to increase unemployment.

Already, key corporate entities, like WalMart, have started moving production back to the US. As the New York Times noted, “A number of companies, including Apple, General Electric and Brooks Brothers, are..making more products in the United States.” Corporate social returns, materializing first as positive reputational impacts, will
increase as a result. This is not inconsequential. Expect an employment boom.

The move also doesn't hurt Mr. Bernanke’s chance of being reappointed for a third term.

Looks like we all win.

Bravo, Mr. Chairman.
________________________________________________
William Michael Cunningham is an economist and social investing advisor. On June 18, 1998, he opposed the application, approved by the Federal Reserve Board on September 23, 1998, by Travelers Group Inc., New York, New York, to become a bank holding company.. In 2003, five years before the financial meltdown, Mr. Cunningham told the Securities and Exchange Commission that his economic models indicated a growing risk of systemic failure. He is the author of The JOBS Act: Crowdfunding for Small Businesses and Startups.
http://www.amazon.com/The-JOBS-Act-Crowdfunding-Businesses/dp/143024755X

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Diversity Index Portfolio Outperforms S and P 500

Creative Investment Research, Inc. announced today that it's Diversity Index Portfolio returned 35.13% from April 19, 2011 to March 30, 2013. The Diversity Index is an investment portfolio containing stocks of the largest companies in the U.S. These companies have been selected because they have outstanding investment characteristics and are top performers with respect to four key measures of inclusion and diversity: Human capital, CEO commitment, corporate communications, and supplier diversity.

By comparison, the S and P 500, or the Standard and Poor's 500, returned 18.14% over the same time period. According to Wikipedia, "The S and P 500 is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard and Poor's. It is one of the most commonly followed equity indices and many consider it the best representation of the market as well as a bellwether for the U.S. economy."

The chart at left shows this performance graphically.

NOTE: "All references to performance in the text, data and spreadsheet refer to an analysis of market indexes or hypothetical portfolios using historical data from April 19, 2011 to March 30, 2013, and not for any actual accounts, either past or present. Static performance: An implicit assumption about the data is that the diversity related performance of the companies would have remained static from 2011 to 2013. In reality, this may or may not have been the case. The diversity related performance of a company will improve and deteriorate relative to peers over time. This type of bias may or may not be significant for the results of the portfolio, but it would definitely impact the selection of companies to be included in the portfolio. The analysis in no way represents the results of actual trading using client assets, but rather involves hypothetical results obtained by means of the retroactive application of a theoretical study and analysis designed with the benefit of hindsight. Expenses: No consideration was given to expenses, which would normally be included in a real-world scenario, including management fees, commissions, markups or markdowns, other trading costs, taxes, and other fees and costs of all types." SOURCE: Profitable socially responsible investing? An Institutional investor’s guide. By Mark J. Lane, Esq., www.advocacyinvesting.com, Institutional Investor Books, 2006.

"Friend of the Court" brief in SEC v Citi submitted. Case heard.

William Michael Cunningham last week submitted a revised "Friend of the Court" brief in a case currently pending before the United States Court of Appeals for the Second Circuit.

The case concerns the rejection, by a Federal Judge, of a settlement agreed to by the United States Securities & Exchange Commission (SEC) and Citigroup Global Markets Inc. (Citigroup), the latter accused of securities fraud.

As a friend to the Court, Mr. Cunningham provides an independent, objective and unbiased view in support of broad public interests. His education and experience have uniquely positioned him to provide objective, independent research and opinions concerning the issues central to the case.

The "Friend of the Court" brief notes that the negative impact of the fraud was $5.5 billion dollars, calculated, using the Fully Adjusted Return® Methodology, as the sum of the loss of all invested funds and the monetary value of societal impacts. The SEC settled the case for $285 million. The fact that the penalty is too small is evidence that the regulator/plaintiff has been captured by the financial services industry. Under regulatory capture, full and automatic deference to Agency decisions is inappropriate, since the Agency cannot make legitimate policy decisions in the public interest. 

The Brief calls for the creation of a special Financial Institution Court of Law. This Court would be responsible for both financial institution and financial institution regulator oversight. The Court would provide flexible oversight that ramps up when needed, becoming active when the number of cases against Wall Street firms exceeds some predetermined number, or when damage due to financial market fraud exceeds some dollar amount.

“Appellate courts ordinarily defer to the agency's expertise and the voluntary agreement of the parties in proposing the settlement” but these are extraordinary times. When industry participants, despite continual Agency enforcement actions, act repeatedly and with impunity in a manner that damages the industry, the country and the global economy, a Court must step in to protect the public. A decision by the (Appeals) Court in favor of the SEC and Citigroup will further weaken this support, to the detriment of market institutions and the public. My economic models continue to show that the global economy remains at risk.

Small Business Impact of the Fiscal Cliff Deal

In an effort to get the word out, yesterday the White House sponsored a conference call with small business owners to describe the "Fiscal Cliff" bill, signed into law by President Obama on January 3rd in a successful effort to avoid a government shutdown. (For a detailed, highly technical summary of the new law, see: http://tax.cchgroup.com/downloads/files/pdfs/legislation/ATPR.pdf)

The law extends the Bush tax cuts for those making less than $250,000. It keeps the earned income tax credit, tax credits for child care, and something called the American Opportunity Tax Credit: college tuition tax breaks. The law also fixes a problem with the Alternative Minimum Tax (AMT), in the sense that those in the middle class will not be faced with a $2,500 increase in taxes due to the AMT.

The White House called this a balanced approach, meaning that upper income persons will face higher taxes. The law reinstates a 39.6% tax rate on those with income over $450,000 (couples)/$400,000 (singles). Certain tax exemptions are limited for those earning more than $250,000.

Dividend and capital gains tax rates will go up to Clinton era rates. The law increases taxes, from 35% to 40%, on estates larger than $5 million dollars. The top 2% of earners will pay tax rates at Clinton era levels.

For small business, benefits flowing from the law are few and far between.

It does support economic growth by maintaining tax credits for certain investment incentives, for Research and Development (R&D), and for Section 179 expensing. It allows small business owners to write off 100% of new (non plant and equipment) investments (up to $500,000). Small business owners can also write off half of new investments in plant and equipment made in 2013. The production tax credit was extended.

For those at the lower end of the income scale, unemployment benefits have been extended for a full year.

Congresses' main goal in drafting the law, according to the White House, was to provide certainty to the middle class about the tax system they will face in 2013. The middle class will be impacted, of course, but they appear to be an afterthought, not the people this law was designed to address. This law speaks to (and for) corporate interests. (That is why the Dow rose so strongly after it was passed...) Among benefits incorporated are tax breaks that "allow manufacturers and banks to defer taxes," a tax designed to subsidize rum production, and tax credits that "finance new luxury apartments"..and "the construction of Goldman Sachs’ new headquarters."

All revenue generated will go to deficit reduction, not spending. This deficit reduction effort is the 2nd phase of an effort begun in 2011, with the 2011 Appropriation bill and the Budget Control Act, which together reduced spending by $1.7 trillion. The current law reduces the deficit by $700 billion. (This is akin to saving water to drink when your hair is on fire: the deficit is the last problem we need to be concerned with. The deal will not increase economic activity or employment over the short term, and THIS is what we should be concerned with.)

Overall, the law moves us away from the Fiscal Cliff, at least for the next two months. It does little to grow the economy. This implies that employment prospects for the vast majority of Americans were not improved by this law. Bottom line: economic and employment growth will continue to be sluggish, thanks largely to the Republicans.

At least we now stand a better than average chance of not falling into another self inflicted recession.