ShoreBank President Uses Saul Alinsky Playbook

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Rules for RadicalsLast week the Chicago Tribune reported that Illinois Finance Authority chairman Bill Brandt threatened “a firestorm” in the Windy City if the Federal Reserve did not follow through with a bailout of South Side-based ShoreBank. This followed some reported pressure applied by the Obama Administration on companies like Goldman Sachs, Citigroup, GE Capital, Bank of America, and Chase, who were asked to kick in $20 million each to make politically-backed community lender appear eligible to receive TARP funds. 

Turns out the preference for Chicago-type coercion goes right to the top (and the origins) of the troubled bank itself.

Mary Houghton is president and co-founder of ShoreBank Corporation, which is the parent to several other affiliated financial institutions and nonprofit organizations. Little is known about her except that she has a passion for microlending (which ShoreBank is heavily involved in) is said to have advised President Obama’s late mother on small business lending initiatives.

But there are a couple of speeches online (one of them costs a little money to access in full) that provide a window into Houghton’s views on how community development banking should work. Keep in mind that ShoreBank (at the time, South Shore Bank) was created in 1973 on Chicago’s South Side to try and forestall neighborhood decay after it had experienced the departure of whites to the suburbs. This was on the heels of the civil rights movement and the activism of the 1960s, when radical Saul Alinsky was active in Chicago and elsewhere. His book Rules for Radicals was “written for the Have-Nots on how to take [power] away.”

In a talk Houghton gave last year at the Yale School of Management she spoke fondly of Alinsky’s accomplishments – especially how he helped gain access to banks:

“And then Saul Alinsky was a Chicagoan, and an organizer who achieved a lot in Chicago in terms of breaking down what was the political machine of the 50s, but one thing that he did that was notable for us, is all banks were required that if they held City of Chicago money, they had to report their home lending data. That became sort of a precursor for the [Home Mortgage Disclosure Act] housing disclosure work that occurred next.”

Among the disruptive tactics (aimed at the “Haves”) Alinsky advocated in Rules were for community activists to: feed 100 blacks a baked-bean dinner then give them tickets to the symphony; overwhelm a high-end department store with the presence of 3,000 blacks on a busy Saturday who have no intention of completing purchases; and have blacks show up en masse at a local bank to open up hundreds of small-deposit savings accounts with plans to close them within days.

Houghton referenced Alinsky favorably (but noted his “confrontation politics”) in another speech available online (this is the one you have to pay for, but a three-minute excerpt is available for free) that she delivered in August 2002 at the Chautauqua Institution. She proudly declared “we run an organization today that is biracial,” hailed microlending, and then advocated these Alinskyite behaviors:

So if we care about what happens to the inner cities of America, or the developing economies in Africa, Asia, the Soviet Union, then we have to also want local financial institutions which have an interest in investing in small entrepreneurs -- investing in people to accumulate personal assets by buying a house or saving their money.

However we all know that banks do not reach out to make small loans. Right? To African-Americans, right? They don’t do that. It’s hard for white bankers to reach across cultures. The transaction costs of small loans are a big barrier. And the bankers hired by the shareholders who are trying to maximize their own financial return – those are true realities.

So in order to deal with the need for these kinds of capital requirements to build economies, we probably need traditional pressure on banks to do what is within their ability to do. They are, after all, offering deposit insurance and that’s a privilege. And they are civic stakeholders, so they deserve to be pressured to do everything that they can do within their own constraints.

Sound a little like the “firestorm” that IFA’s Bill Brandt proposes, and the arm-twisting being exerted by the Obama Administration? Houghton also implies that big bankers are all greedy racists. She continued:

“We’ve been very lucky in the United States that there has been this pressure by citizen groups on bankers. Billions of dollars have flown into inner cities in the last decades, due to the Community Reinvestment Act, which was pushed by very skilled consumer advocacy groups….”

“But we know that a small town might die or prosper depending upon the personality of the bank president.

The Community Reinvestment Act was also pushed by Houghton’s partner and co-founder at ShoreBank, Ron Grzywinski, who testified before Congress in favor of its passage. Then Houghton delivered a laugh-out-loud statement:

“I want you to also think about banks in the developing world….what I’ve learned in the last few years, is that, if you think about it, in a developing country – say Kenya – like 75 percent of all the economic activity is being undertaken by small businesses or self-employed people. There’s not a sector of medium-sized or large businesses. And so a bank that will reach those small and micro-businesses is essential to the infrastructure of those countries….

“So who’s going to do that? Well, it’s not going to be the private bankers who currently are operating in those countries. I have myself had a chance to visit Kenya and Bangladesh, and the banking systems are quite corrupt. They cater to the politicians, and to the very wealthy.

“So, pressure is necessary to stop that.”

I guess Houghton forgot about the corruption at the Community Development Financial Institutions Fund that benefited ShoreBank during the Clinton Administration, when its affiliates were granted more than twice the amount it was allowed to receive under the law. Also, ShoreBank was granted funds by CDFI without employing any kind of scoring system or paper trail to evaluate ShoreBank’s requests for funds – unlike other applicants. The top two managers of CDFI lost their jobs. 

Finally, Houghton ended her remarks not by emphasizing the need for individuals to work hard, save, and build businesses the old-fashioned way, but instead by demanding some sort of right for access to other peoples’ capital:

“Where there’s a problem in a community, probably the way to solve it is to try to build a diversified economy, which means you have to probably build it from the bottom by supporting local businesses, local entrepreneurs, and that probably means that you need to be sure they have the institutions that can fund that activity. The conventional banking system has all the money, and so once these things get proved up and the markets are healthy enough, the banks can move in. But before that you may need some additional tools like these microfinance institutions or development banks.

“You know, the banks are not going to do this unless they’re forced to. You have to be realistic about what they can and cannot do, but community pressure is important.”

But then during a question-and-answer period at Chautauqua, Houghton surprisingly advised against community development nonprofits dependence on government subsidies:

“We still live in a society in which we rely on government too much, but I would put with that the people who like to do this work – the not-for-profits – also rely on government too much. They sort of still have a little bit of an entitlement attitude that ‘they deserve to get the government’s money,’ and they don’t have to meet the mark of being a sustainable, permanent institution. And so on some level it’s easier to go after subsidy than it is to run a bank.

But if you’re serious, you know, look at those microfinance organizations abroad who are serious. They wouldn’t dream of not being self-sustaining, and they wouldn’t dream of figuring out how to not rely much on subsidy, because they know that there’s not enough subsidy in the world to really make a difference.

But in her final comments, in response to a question about how to pressure banks, she reverted earlier form:

“I think the way that you pressure your bank, by-and-large, is using the Community Reinvestment Act….This is an act which says that every bank must meet all the credit needs in its service area. And it can be challenged on whether it is or is not doing that any time it wants permission from the regulators to do anything.

“So in the 70s, 80s, and the early 90s, community groups would have the right to appear when the regulators were thinking about letting, say Bank of America, merge with NationsBank. And earlier, there were many times when a merger would be stopped by an examination of the bank’s Community Reinvestment Act. And that was very significant – it got the banks’ attention.

“The act has been refined over the years so it’s now even better than it was before. But I think anyone who was in a community who was trying to do something about the bank’s role in the market, would study up on the Community Reinvestment Act, and organize around that.”

And now Houghton – the anti-government subsidy, pressure-the-racist-banks president of ShoreBank – seeks help with both from the top community organizer in the highest office in the land.

Related:

White House Denial on ShoreBank is Sestak-Like

'Firestorm' Promised to Save Politically-Connected Chicago Bank

White House Bails Out ‘Clinton’s Favorite Bank’ Through Goldman Sachs, Citigroup, GE

Congress Seeks to Expand Community Reinvestment Act, Encourage Shakedowns