The Justice Dept., Federal Reserve, and Federal Trade Commission have just extorted $1 million from Shawmut Mortgage Co., a subsidiary of Shawmut National Corp. in Hartford, and all concerned are happy, including the chairman of the bank and the Wall Street analysts who follow it.
Ostensibly, the money was paid to settle a discrimination suit in mortgage lending, but in reality, it was a bribe paid so that the Fed would remove barriers it had erected to the bank's acquisition plans. The settlement clears the way for Shawmut to reapply to regulators for the acquisitions it seeks. Federal Reserve Governor Lawrence B. Lindsey, who organized the hit on Shawmut, says: "I've always thought that Shawmut wasn't damned for all eternity. If they reapply, the wheel doesn't have to be reinvented."
The $1 million meant little to the bank and wasn't the real price of the agreement. In order to move ahead with its growth plans, Shawmut had to agree to participate in a sham that would increase the government's powers of intimidation over financial institutions. The bank had to agree to "settle" a discrimination suit that had no individual complainants. The basis of the suit was a computer model that finds discrimination in statistical disparities.
The absence of real victims has led to the formation of a Justice-Shawmut team to search out 75 to 150 people to designate as "mortgage-discrimination victims," who will share the settlement cash. It's like convicting a person of murder and then searching for a body.
PACKAGE DEAL. The consent decree itself is a dead giveaway that the affair is a sham. Its first sentence reads: "The U.S. files this Consent Decree simultaneously with its Complaint against the Shawmut Mortgage Co." In other words, the complaint and the consent decree were a negotiated package. There is no evidence in the complaint of any wrongdoing. Indeed, between 1990 and 1992, when the alleged discrimination occurred, the mortgages Shawmut granted to minorities doubled, from 274 to 599, and the mortgage-rejection rate fell by 28% for African Americans and by 38% for Hispanics. Moreover, the bank had in place a program that aggressively sought mortgage business from low-income applicants and gave its loan officers broad discretion to approve applications on the basis of "compensating" criteria when normal requirements couldn't be met.
Obviously, the bank was leaning over backwards to make loans to people who are not normally seen as good credit risks, and a mean-spirited federal government took advantage of this generosity. In such a lending situation, some loan officers will decide to further their careers by pushing out as many loans as possible; others, more risk-averse, will worry about too many defaulted loans coming back to haunt them and will not push the "compensating" criteria to the same boundaries. The government found discrimination in this program that was benefiting minorities, because the bank had no internal-review mechanism to make certain that each loan officer provided every less-qualified applicant with an identical amount of "compensating" criteria.
HOCUS-POCUS? There are only two remaining pools of private wealth that the government doesn't have its hooks into--pensions and the assets of the banking system. The political left, disproportionately represented in the Clinton Administration, has both in its cross hairs. Shawmut's consent to the phony charge was essential to establish the credibility of the government's claim that its model is a reliable ferret of racial discrimination. "Learn from Shawmut's experience," Attorney General Janet Reno warned banks. "Do not wait for the Justice Dept. to come knocking" before pouring taxpayer-insured deposits and shareholders' equity into high-risk inner-city loans. To underline the message, Justice now is turning the statistical-disparities weapon against Chicago's Northern Trust Corp.
Many distinguished economists, including Gary S. Becker in this column (BW-Apr. 19), have noted that statistical disparities have many explanations other than racial discrimination. If mortgage lenders were discriminating, minority loans would have lower default rates than loans to whites. Lower default rates would be a sign that stricter standards apply to minorities. In turn, that would mean that loans made to minorities would be more profitable than those made to whites.
But neither the Fed nor Justice has produced evidence that minority mortgage loans have lower default rates. Instead, we have the paradox of a well-known market economist, Larry Lindsey, arguing that competition in the market stops short of equalizing default rates and that lenders forgo profits in order to make less-profitable loans to whites. No economist will credit this claim, which flies in the face of a fundamental tenet of economic analysis--and certainly not without highly credible evidence.
In trying to appease its left-wing critics, the Fed is playing a risky game. By compromising its integrity, it will find itself without friends when its many enemies turn up the heat.