WASHINGTON — Charges that Rep. Maxine Waters, D-Calif., helped win special treatment for a struggling bank may add fire to a continuing debate over whether the government's system for awarding bailout funds was fair, observers said.
An ethics panel report alleges that Waters may have broken rules in 2008 when she helped a trade group arrange a meeting between then-Treasury Secretary Henry Paulson and executives of OneUnited Bank, a minority-owned Boston institution with financial ties to her husband and huge losses from the takeovers of Fannie Mae and Freddie Mac.
The bank's fortunes appeared to improve markedly after it received a $12 million infusion from the Troubled Asset Relief Program.
Observers said the ethics investigation may fuel arguments that other banks which did not get Tarp funds — including others with Fannie- and Freddie-related losses — and subsequently failed, could have been treated differently.
"This is probably the most blatant example … of special attention or favoritism or whatever you want to call it," Ken Thomas, a Miami-based independent bank consultant and economist, said of OneUnited. "It's too late for those banks that have already failed — the banks that didn't have the favoritism didn't know the right people and didn't have the connections."
By the end of 2008, shortly after the launching of Tarp, the conservatorships of the government-sponsored enterprises had left OneUnited seriously undercapitalized. Its capital-to-assets ratio was below zero, and its loss for the year totaled $33 million.
But at the end of 2009, after the Tarp investment, its prospects had improved. It reported a profit for the year of $3.3 million. And at the end of March of this year, its capital-to-assets ratio was 7.1%. (At the end of the first quarter of 2010, OneUnited reported total assets of $532 million, according to the Federal Deposit Insurance Corp.)
A provision in the law establishing Tarp had called for special consideration of institutions with heavy GSE losses, but numerous institutions hurt by the Fannie and Freddie conservatorships were ultimately closed.
For example, National Bank of Commerce in Berkeley, Ill., sued the Treasury Department after being refused Tarp funds. It lost the case and failed in January 2009.
In another case, the head of FBOP Corp., a chain of nine banks that failed in the fall of that year, told a congressional panel in January that a Tarp investment would have saved the company.
On another side of the coin, even some institutions that got Tarp funds ultimately failed.
"The issue is: Were all marginal institutions treated similarly? It continues to be a problem. The calculus used by the regulators in determining whether or not to permit an institution to receive Tarp is a black box," said Kip Weissman, a partner at Luse Gorman. "Certainly, institutions that were put in receivership that could have been saved by Tarp would like to know why they didn't qualify," he said.
Weissman said that, depending on how long the ethics investigation lasts, details of how officials decided on Tarp infusions may come out.
"If Treasury witnesses are called, they probably will be asked why" OneUnited "received Tarp," he said. "Under those circumstances, we may get a better idea of what the man was doing behind the curtain."
But others were less convinced that banks that did not receive aid will somehow be vindicated.
Robert Klingler, an attorney at Bryan Cave LLP in Atlanta, said the government had a uniform standard for deciding Tarp investments — essentially awarding funds to institutions that could prove their viability — and no one ever expected the system to be perfect.
"We understand that the process will sometimes result in wrong outcomes," he said, adding that those who believe they were treated unfairly could use the Waters investigation for "rhetoric" at best.
"I don't know that it is rhetoric that necessarily the public is happy with," Klingler said. "Generally, the public is opposed to Tarp. So hearing a bank whine about not getting Tarp isn't going to get the American public riled up."