Too Small To Save

I’ve got a new big feature in the Prospect for your reading pleasure. It’s about the life and death of a pioneering financial organization called Shorebank. Here’s a sample:

The institution seemed to do the impossible, lending money at profit without exploiting low-income customers. That is, until Friday, Aug. 20, when officials from the Federal Deposit Insurance Corporation and the Illinois state government arrived at ShoreBank’s headquarters on South Jeffrey Boulevard to seize the bank’s assets and take over management. Regulators had determined that ShoreBank was losing too much money to remain solvent and stepped in to protect insured deposits after more than a year of warning the bank it was on the verge of failure. ShoreBank appeared to have collapsed under the weight of its triple-bottom-line mission.

For conservative critics, who saw government policies promoting community development and fair lending as nothing more than market distortions, the collapse was a fait accompli. “Social and environmental justice may make for good Volvo bumper stickers,” crowed Michelle Malkin. “They do not, however, make for a good bottom line.” But those who sympathized with the bank’s mission blamed the broader carnage of the recession. “The fact is that ShoreBank was enormously important symbolically, it was very important historically, it was very important to the communities it served,” says Cliff Rosenthal, who leads a national federation of community credit unions. “But we’ve been hit by an economic tsunami in this country.” Indeed, the financial crisis has washed away financial institutions of every stripe — 307 of them since the beginning of 2008. The FDIC closed seven other banks on the same day it closed ShoreBank.

So which is to blame for the collapse of ShoreBank — its social-justice mission or the economic downturn? The competing explanations for its failure have made an abstract debate over community finance tangible, with pundits of all stripes citing ShoreBank as an example in recent debates over the government’s role in the financial system. The real story, however, is about how we hold banks — all banks — accountable.

Read the whole thing!

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