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

Paul Craig Roberts

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.

If banks can be forced to lend to "protected minorities" at below-market rates, then it follows that banks could be forced to give interest-free mortgages. The government is developing precedents that will permit it to extend this unpredictable form of taxation from banks to all U.S. businesses - a development that has serious implications for their profits and capitalized values.

Cornell University law professor Jonathan R. Macey says, "The government's willingness to proceed with litigation in the absence of evidence of discrimination . . . is scandalous in a nation that purports to be governed by the rule of law." The Justice Department is substituting coercion for law and creating a status-based legal system in which privileges are granted on the basis of race. To understand how great these privileges are, consider the fact that if Chevy Chase's executives awarded themselves loans on the terms they must now offer blacks, they would be indicted for self-dealing.

In the new legal regime that is being created by consent decree, every bank with one or more branches that does not have branches in black Census tracts is guilty of racial discrimination. In Attorney General Janet Reno's expanded interpretation of disparate impact, banks without branches in minority Census tracts are guilty of shunning an entire community because of its racial makeup."

The Community Reinvestment Act, which once meant that banks had to serve the communities in which they collected deposits, now means that banks cannot have a disproportionate number of branches in white Census tracts or make a disproportionate share of loans to white customers. To enforce compliance with the new legal regime created by consent decree, federal regulators are trying to force banks to report the race and gender composition of all their consumer and business loans. To fully see the mischief in this, consider that a male-female partnership is classified as male unless the woman holds 51 per cent of the equity; likewise for a white-black partnership. Husband-wife co-signed loans are also male under the proposed reporting form.

Now that the banks have been conquered, the Clintonistas have mutual funds and pension funds in their crosshairs. Treasury Undersecretary Newman wants a percentage of mutual-fund assets invested, in community projects such as public housing. Currency Comptroller Ludwig wants all financial institutions to understand that "we need your help in the community." Labor Secretary Robert Reich has set the stage for private pension holdings to be diverted into public housing and other such "investments" by amending the ERISA regulations so that pension-fund managers can invest in "socially useful" public programs that have "collateral benefits" over and above the private welfare of the pensioner. Such "socially useful" investments will be defined by the secretaries of HUD and Labor.

The American people are totally in the dark about the substantial tax imposed by unelected regulators that is about to take a chunk of their pension and mutual funds. They will learn nothing of this extraordinary development from the mindless establishment media. The people's representatives, in Congress are silent. One day Americans are going to wake up to discover, as the beneficiaries of the Kansas Public Employees Retirement System recently did, that a portion of their pension has been lost in uneconomic investments in public housing that had "collateral benefits" approved by HUD.

Americans will soon have to come to grips with the startling fact that their government is the only active socialist government on the face of the earth. Everywhere else socialism has given way to privatization. Where the old socialist forms still stand, they are hollow, devoid of ideological energy. In the United States, Clintonista activists are rapidly changing the nature of our institutions. The American people have dismissed Clinton as a womanizing clown, but he has staffed his Administration with determined socialist-minded officials who have set their sights on everything we have.

COPYRIGHT 1994 National Review, Inc.
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