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The Future of ShoreBank

Adam Rust's picture

Posted August 20, 2010

The time for a decision on ShoreBank may be coming soon.

A few rumors are circulating that the FDIC is ready to make a decision about ShoreBank, the famous Chicago community development lender that helped to define the field of community capitalism.

ShoreBank created a model of making loans in low-and-moderate income neighborhoods in the South Side of Chicago. ShoreBank ignored many of

the underwriting metrics used by mainstream banks, and focused on lending to working-class families with jobs. ShoreBank worked in places like Woodlawn, Bronzeville, and the area that once encompassed the Union Stockyards. This is an important area in American History: it is the location for The Jungle, Black Metropolis and A Raisin in the Sun, architecture by Frank Llloyd Wright, and the birthplace of political figures that include the Daley family.  In recent years, a well-intentioned young lawyer from Harvard made the Southside his home. He later became a Senator and then the President of the United States.

That last detail may help ShoreBank.  Still, it's probably some fuzzy thinking to believe that ShoreBank is just an extension of President Obama's political sphere.  The Wall Street Journal makes that implication when they characterize the institution as "the troubled Chicago community lender with ties to the Obama administration." ShoreBank was making loans before Obama entered high school.

The FDIC does its work on Friday afternoons. Were the FDIC to decide to shutter Shorebank, it would take place at the end of business Friday. No one would have advance notice, and no one would be given a chance to work late to retrieve ther things.  The FDIC comes knocking and there is no recourse.

Initially, it seemed possible that the FDIC would close ShoreBank. This is complicated by political reality, and also by the demand in the market for bad assets. This outcome would require the FDIC to take on new liabilities.

What has emerged is another option: that a group of private buyers, some from the existing circle of management, would step in to take over the bank. The buyers still might be able to pick and choose from the balance sheet, taking the "good" assets and moving the "bad" assets to the FDIC.

That is a very favorable deal.