How Maxine Waters and Barney Frank let one bank repackage its problem as a national crisis.
On Nov. 29, Congresswoman Maxine Waters, D-Calif., will face a House ethics trial for the role she allegedly played in helping a minority-owned bank called OneUnited—a bank in which her husband owned a sizable stake and on whose board he'd once sat—get $12 million in the 2008 bank bailout. Had OneUnited failed, the ethics committee that brought the charges alleges, Waters' husband's "financial interest in OneUnited would have been worthless." The ethics committee alleges that Waters' chief of staff and grandson, Mikael Moore, was "actively involved" in helping OneUnited and that Waters' "failure to instruct [him] to refrain from assisting" the bank violated House rules. Waters has strongly denied the charges: "No benefit, no improper action, no failure to disclose, no one influenced: no case."
The Washington Post and the Wall Street Journal have reported in detail about the involvement of other powerful people in OneUnited's rescue—most notably, House financial services Chairman Barney Frank. But one question that nagged at me was precisely how, in the midst of a full-scale meltdown of the U.S. banking system, the rescue of one small, not-very-well-managed bank captured anyone's attention in Washington. And, oh, how it did, as documents I recently reviewed show. At times, those involved in helping OneUnited have argued that they were broadly focused on saving minority and small banks—which, if true, would have been a critically important task. But the documents also show that while the specific crisis facing OneUnited was indeed presented, more than once, as a crisis facing minority-owned banks in general, the Federal Deposit Insurance Corporation pretty much immediately told all concerned that this crisis did not, in fact, exist. The documents also show staffers repeatedly proposing solutions that were specifically tailored to OneUnited, rather than to any broader group of banks. No other bank, whether a small bank or a minority-owned institution, seems even to have merited individual attention in the memos. One question Waters' trial will likely answer is why OneUnited got such special treatment.
OneUnited was founded in 1982, and grew through a series of acquisitions into the country's largest minority-owned bank, with branches in Los Angeles, Miami, and Boston. A majority of the stock—51 percent—was owned by Kevin Cohee, who serves as the bank's CEO, and his wife, Teri Williams, who serves as president. OneUnited and Maxine Waters have a longstanding relationship. The Cohees gave money to her campaigns and had her to their home for a fundraiser and a company Christmas party, according to ethics investigators. In March 2002, when a minority-owned bank in California called Family Savings Bank was on the block, Waters and others sent a letter to Gray Davis, then the state's governor, urging that Davis "do whatever is necessary and within your power to insure that Family Savings Bank is acquired by a minority-owned financial institution." Cohee's bank ended up acquiring Family Savings. In January 2004, Waters' husband, Sidney Williams, joined OneUnited's board; although he left in the spring of 2008, by that summer, he still held about $352,000 worth of stock, which according to the ethics committee accounted for somewhere between 4.6 percent and 15.2 percent of Rep. Waters' and her husband's combined net worth.
As the financial crisis gathered steam over that scary summer of 2008, OneUnited ended up in a precarious position. The bank owned just over $50 million of preferred shares in Fannie Mae and Freddie Mac, which accounted for literally all of its capital. On Aug. 22, 2008, Robert Patrick Cooper, who served as both OneUnited's senior counsel and as the chairman-elect of the National Bankers Association, which is the trade association for the nation's minority- and women-owned banks, sent Waters a letter on OneUnited letterhead, telling her that the "recent decline in the value of the preferred stock of [Fannie and Freddie] creates significant and possibly fatal losses for minority banks [italics mine]. …" Waters, the ethics committee notes, has dedicated considerable effort over the years to helping minority and community banks. Rather than warn about imminent losses to "minority banks," however, Cooper would have been more truthful to warn about losses facing "my minority bank."
On Sept. 7, the government put Fannie and Freddie in conservatorship, wiping out the value of the preferred shares. The next morning, Sept. 8, Paulson's assistant, Christal West, sent an e-mail to others at the Treasury Department. Waters, it said, "called [Paulson] this morning. They just spoke and he agreed to have the Minority Bankers Assn come to Treasury tomorrow for a 10:00 am Meeting with[Anthony Ryan, who was then the Treasury's acting undersecretary for domestic finance]." Paulson told investigators unequivocally that he wouldn't have set up the meeting were it not for Waters' phone call, and he was confident that she didn't mention any financial interest or any specific bank. As for Waters, she told investigators that "you don't use your chits for nothing, you call when there is an important issue."
Off the bat, investigators noted that it was "cause for concern" that although there were 103 minority- and women-owned banks, two of which were in the Washington, D.C., area, no representatives of those banks were present. Indeed, of the four people who were scheduled to attend that Sept. 8 Treasury meeting from the minority bankers' trade association, only one wasn't affiliated with the Boston-based OneUnited. This caused some surprise at Treasury. The evening before the meeting, Treasury staffer Jeb Mason wrote, "Does everyone know that [National Bankers Association] is bringing just four people?" Staffers were also concerned that given the size of the NBA party, it would seem strange to have representatives from the Office of the Comptroller of the Currency, the FDIC, the Fed, and the Office of Thrift Supervision there. But as Mason wrote, "If they really want to be there, I think we should let them—they may given who's asking. …" The meeting was also attended by Erika Jeffers, a counsel for the House financial services committee, which is chaired by Barney Frank, and by Waters' chief of staff, Mikael Moore.
According to a memo sent late that evening by FDIC staffer Sandra Thompson to FDIC Chairwoman Sheila Bair, the substance of the meeting made it clear that this was a OneUnited issue. Thompson wrote that during the meeting, the OneUnited attendees argued that Treasury's action had "totally wiped out their capital." She continued, "They asked Treasury to make them whole and infuse $50 million. … They also said that the Treasury's actions with respect to [Fannie and Freddie] have impacted a lot of [minority depository institutions]—and the entire minority banking community was devestated [sic]." But when Thompson asked how many banks were affected, Cooper, the OneUnited senior counsel and chairman-elect of the minority bankers' trade group, said he didn't know. Thompson wrote in her memo to Bair, "I then mentioned that the universe of affected [minority-owned banks] was less than five institutions." After the OneUnited executives had left, Thompson's memo says that she explained to the other regulators and Treasury that they were talking about only two institutions. (The other was a small Texas bank that was on the verge of failure regardless.)
According to Waters' presentation and testimony, it wasn't until she understood that OneUnited was interested in receiving funds from the bank bailout (the Troubled Asset Relief Program, or TARP) on or around Sept. 20 that she "realized that if they were asking for money that I perhaps should take a distance from that." So she told Barney Frank, "Barney, I can't deal with that." Frank, according to investigators, said this was a "conflict of interest problem" and told her to "stay out of it" and asked his staff to take over the OneUnited issue. He also told investigators that he had at least two conversations with Rep. Waters in which he told her not to get involved with OneUnited, but he said he couldn't remember specific dates. Frank has told the press and investigators that he got involved independently after hearing from constituents—OneUnited is headquartered in his state. He was, he's said, broadly concerned about—you guessed it—the fate of minority and small banks during the financial crisis and that this was in no way a "handoff" from Waters.
What's clear is that the high-level interest in solving OneUnited's problem didn't abate even after everyone knew that this was pretty much a one-bank issue. FDIC chief Sheila Bair responded to Thompson's memo: "OK, Paulson called me and said they would try to help if necessary though he wasn't sure they could legally. I told him I thought we could help them work through it but would let him know if help was needed. …" And on Sept. 9, Erika Jeffers sent an e-mail to Frank in which she told him that "OneUnited Bank argued that it was in serious danger of failing if Treasury decides not to offer some sort of protection of [sic] buyback to it … it is unclear to me whether there are any other [minority owned institutions] that are facing the same capital situation as OneUnited right now. … FDIC staff seemed skeptical. …"
E-mail traffic suggests that some agency staffers weren't thrilled by the situation. On Sept. 12 , after an FDIC staffer wrote a memo noting that it wasn't clear Treasury could take action, another staffer responded: "How's this angle evolving? Going nowhere I hope. There is no reason to talk about moral hazard if it does. These guys chase 8 or 9 [percent] yields and expect it to be risk free. It's a joke."(It turns out that OneUnited had bought the Fannie and Freddie preferred stock in early 2008, when it was already yielding a higher than normal amount due to the market's concern about the risk.)
Bethany McLean is a contributing editor at Vanity Fair and the co-author of All the Devils Are Here: The Hidden History of the Financial Crisis.
Bethany McLean writes a weekly business column for Slate and is a contributing editor to Vanity Fair. She is the author (with Joe Nocera) of All the Devils Are Here: The Hidden History of the Financial Crisis and (with Peter Elkind) "The Smartest Guys In The Room."
Photograph of Maxine Waters and Barney Frank by Alex Wong/Getty Images.