Confiscation by consent decree - Department of Justice extorts money from financial institutions

Extortion, a federal crime, is now a favorite tactic of the U.S. Department of Justice. So far the feds are extorting only banks, but Justice Department honchos Janet Reno and Deval Patrick have plans to expand their victim base to include all financial institutions - pension funds, mutual funds, private mortgage companies, insurance companies. The weapon is the threat of racial-discrimination suits, and the bandit gang includes Frank Newman, a Treasury undersecretary; Eugene Ludwig, Comptroller of the Currency; Robert Reich, Labor Secretary; Jonathan Fiechter, acting director of the Office of Thrift Management; Roberta Achtenberg, Assistant Secretary for Fair Housing and Equal Opportunity at HUD; the Federal Reserve; and the American Bankers Association.

What is the ABA doing in this gang? It joined in pursuit of a level playing field. Since the bankers now have to pay protection money to stay in business, they want their competitors to incur the same added costs.

The Justice Department first got into the extortion racket when left-wingers realized that taxpayer revolt limited the moneys that they could squeeze out of the tax system for their redistributionist schemes. So they went to work to commandeer the assets of the two biggest pools of private money that had so far escaped their hooks. private pensions and the banking system.

The gang began with the banks, because their heavily regulated status and the Community Reinvestment Act made them vulnerable to government pressure, whereas pension funds were protected by the Employee Retirement Income Security Act (ERISA), which, as originally construed, requires that pension funds be invested solely for the benefit of participants.

In 1992 Alicia Munnell - then an official at the Boston Federal Reserve Bank and now a temperamental Assistant Secretary of the Treasury for Economic Policy - concocted a "study" that purported to find racial discrimination in mortgage lending. The flaws of the study have been pointed out by researchers at the Federal Deposit Insurance Corporation and by numerous journalists (including Peter Brimelow and Leslie Spencer of Forbes) and scholars (including Nobel Prize-winner Gary Becker). Basically, Miss Munnell concluded that blacks had a higher mortgage-rejection rate than whites and that this was evidence of racial discrimination.

The FDIC discovered that Miss Munnell's data set was contaminated by two institutions that specialized in soliciting mortgage applications from marginally qualified blacks. The higher rejection rate that she found damning stemmed entirely from the active solicitation of applicants who were unlikely to be qualified. Moreover, any economist worth his or her salt would know that a charge of racial discrimination in lending would require that loans to minorities show lower default rates than loans to whites. Lower default rates would be a sign that stricter standards were applied to minorities, which in turn would mean that at the margin where decisions are made, blacks were being turned down in favor of whites who were riskier (and therefore less profitable) prospects.

Miss Munnell's study offered no evidence whatsoever that discrimination had stopped the market from equalizing default rates and that lenders were forgoing profits in order to give whites preference over blacks. No economist will credit this claim, which flies in the face of a fundamental tenet of economic analysis, but this didn't stop our government from using Miss Munnell's study to force a sham discrimination settlement on Shawmut Mortgage Company, a subsidiary of Shawmut National Corporation.

First Hostage

Shawmut was vulnerable because it had expansion plans and, ironically, a special facility that lends to blacks who cannot meet the normal criteria for a mortgage. The latter radiated a typical liberal guilt syndrome that the government could manipulate, and the former gave the government leverage to hold the bank's business hostage to a settlement.

The surprise player in the extortion was market economist and Federal Reserve Governor Lawrence B. Lindsey, who blocked Shawmut's planned acquisitions until the bank agreed to settle the sham suit, which had no individual complainants. The absence of any victims meant that Shawmut had to fork over only a token $1 million. The Justice Department wasn't interested in the money and had no idea to whom to give it. The Department was testing its powers to hold a business hostage in order to develop law by consent decree that could then be applied to other businesses.

The next victim, Chevy Chase Federal Savings Bank in Maryland, didn't get off so easily. In the Chevy Chase case, the government, now confident of its dictatorial powers, didn't bother with a study. The Justice Department pronounced the bank guilty of an infraction so new that it is not on the statute books: the failure to open enough branches in "majority African-American Census tracts," as the coerced consent decree puts it, in the District of Columbia and Prince George's County. In short, Chevy Chase was told that if it wanted to conduct business in suburban Maryland, it had to open four superfluous branches in black Census tracts, to budget advertising for black publications, to adopt more employment quotas, and to make loans to blacks with interest rates at either one percent less than the prevailing rate or one-half percent below the market rate combined with a grant to be applied to the down payment requirements," to quote from the government's triumphant press release.