Thanks To Former Pres. George W. Bush's Wall Street Deregulation Which Spurred Predatory Lending Practices, The Most Affluent Black County In America: Prince George, Maryland Is Now Experiencing Record Foreclosures.
Do You See How GOP Lawmakers Are Slowly Trying To Destroy The Black Community's Wealth?
Prince George’s County, Md., has gained prominence in recent years as the most affluent county in America with a majority African-American population. Average income in the county is almost double the national average for black families, according to the Census Bureau’s 2009 American Community Survey.
But the county, adjacent to the District of Columbia, has been laid low by the recession and the mortgage meltdown and now holds a more dubious distinction: a rising foreclosure rate that ranks as the worst in Maryland.
More than half of all housing sales in the county so far this year have been properties in foreclosure, a rate that dwarfs other counties in the state, according to MRIS, which provides listing services for real estate agents. This has caused a domino effect of social, economic and financial problems to ripple throughout Prince George’s communities.
“The biggest changes I’ve seen are very visual,” said District Heights resident Yvonne Brown. “If you just drive down my street, there are four empty homes with the grass ten feet tall. It’s heartbreaking.”
Foreclosure sales, which have risen from 34 percent in 2009 to 51 percent so far this year, are just one sign of problems affecting Prince George's.
The county has imposed a hiring freeze, except for new public safety workers, and it recently cut $13 million from the school budget, although the county government's finances are solid enough that all three major rating agencies recently awarded it their top AAA bond rating. A wave of homicides this year has raised concern about safety in the county, and former County Executive Jack Johnson pleaded guilty last month to federal charges stemming from a sweeping corruption investigation.
Experts say there are a variety of reasons why the county ended up in the middle of the mortgage mess.
A decade ago, housing stock in Prince George’s was significantly less expensive on average than in any other suburban county in the D.C. metro area, so it had strong appeal for first-time homebuyers, said Anirban Basu, economic analyst and CEO of Sage Policy Group, a Maryland consulting firm. In general, home prices in low- and moderate-income neighborhoods rose more quickly in the boom and have fallen more sharply in the bust, Federal Reserve Gov. Janet Yellen noted in a speech Thursday.
Prince George's County also was a hotbed for speculative activity among professional and amateur investors during the housing upturn, Basu said. “The demographics of those affected correspond neatly to the demographics of a first-time home buyer: lower and less-stable incomes,” he said.
Brown, 34, is a prime example. As a first-time homebuyer and single black woman, Brown moved to Prince George’s in 2006 from nearby Montgomery County because she couldn’t afford home prices there.
She paid $230,000 for a tiny, 664-square-foot home that she said is “more like a small cottage.” The previous owners had paid $60,000.
“I didn’t go outside of my means and buy an astronomically large home,” she said. “I did something extremely practical.”
Bob Ross, president of the county branch of the National Association for the Advancement of Colored People, said it was clear that when the housing bubble burst, many newcomers were hit harder than the older, more established families.
“People didn’t fully understand what they were doing when they refinanced or when they took out more mortgages,” he said. “I can’t speak for the NAACP, but I do personally believe that discriminatory lending was going on.”
A 2008 report from the National Commission on Fair Housing and Equal Opportunity highlighted the practice of “reverse redlining,” which occurs when lenders target minorities with costly, subprime loans that they may not need or be able to afford. Analysis of data from 2006 indicates that roughly 54 percent of African-Americans and 47 percent of Latinos received subprime loans, compared with about 17 percent of whites, according to the report.
“If one considers the group that is most impacted (i.e. African-Americans and Hispanics), one can make a credible argument that the lending practices and the aggressiveness of subprime lender greatly contributed to the high rate of foreclosure,” Eric Brown, director of Prince George County’s Housing and Community Development Department said in an email.
Newly elected County Executive Rushern L. Baker III said his administration is doing everything in its power to help keep residents in their homes. County officials have allocated $1.8 million in their 2012 budget to rehabilitate abandoned and foreclosed properties.
Baker said in an email that the county is stressing preventative measures "to get people assistance before it’s too late.”.
Carol Gilbert, assistant secretary for neighborhood revitalization in Maryland’s Housing and Community Development Department, said Prince George's County accounts for 25 percent of the state's foreclosures. "It will get worse before it gets better, especially for Prince George’s County,” she said.
“While a lot of gains were made in home ownership, more so in the last three to five years, the foreclosure crisis really hit the minority community the hardest,” she said. “That’s a very big step backwards for building equity and wealth over time.”
In an effort to slow the foreclosure wave, the county is promoting non-profit housing counseling programs like the Housing Initiative Partnership (HIP), which provides financial literacy resources and helps homeowners understand their options.
Brown has been taking advantage of HIP’s help to try to get a modification on the two mortgages she has on her home. Without their help, she would have probably lost her home, she said.
With one in four people in Prince George’s behind on their mortgage, and only six counselors on HIP’s staff, their phones have been ringing off the hooks for the last three years and their calendars are booked for weeks, said Mary Hunter, director of
There’s just not enough funding to support the counseling that’s needed,” Hunter said.
While Hunter still has clients coming in because of predatory loans, more of her clients now are having trouble due to declining incomes. They aren’t necessarily unemployed, she said, but they may have lost a second job, overtime hours or supplementary income from a spouse. Also, Hunter said fewer people are receiving unemployment benefits now than a year ago.
As a high school English teacher, Brown has had to deal with budget cutbacks and furloughs that affected her paychecks. The after-school tutoring programs that Brown depended on for a supplemental income are gone too.
Now she’s hoping to find help in the state’s Emergency Mortgage Assistance Program. The Maryland Department of Housing and Community Development recently received federal funding to offer a limited number of no-interest loans to homeowners who have fallen behind because of loss of income due to unemployment or health issues.
“There’s a huge demand for this program now,” Hunter said. Eligible homeowners can get a zero-interest loan of up to $50,000 for two years to help them with their mortgage. “It can be the only hope people have to save their homes,” she said.
Brown is in the process of gathering her paperwork to apply for the program. Though she has her hands full with a 10-month old child and another on the way, she has been relentless in the fight for her home.
“People don’t understand how much help is out there,” she said. “They’re very depressed and consumed in their situation, and they can’t get past it to apply for a program to get the help they need.”
Bank of America Corp.'s top mortgage executive will tell a Senate panel today that the Charlotte bank is taking steps to improve loan modification and foreclosure processes that have confounded many struggling borrowers.
Among the changes, the nation's biggest Mortgage Servicer has started giving borrowers a single point of contact in the modification process, Barbara Desoer says in written testimony submitted to the Senate Banking Committee. Homeowners often complain about being passed from department to department when they're seeking agreements to reduce their payments.
The bank is also looking to change an industrywide practice of considering a borrower's modification request, while also taking steps toward foreclosure, she says. This so-called "dual-track" system has led to incidents in which borrowers face foreclosure proceedings even as they're working out modifications.
Bank of America doesn't "claim perfection," Desoer says in her prepared remarks, but continues to "put forward solutions that respond to customer needs."
The bank is working with state attorneys general and other parties as it makes changes to its approach, Desoer says. Last week, bank executives were in Iowa for discussions with state officials who are leading a probe of foreclosure practices at the nation's biggest lenders. N.C. Attorney General Roy Cooper and some of his peers have indicated that changes to modification programs may be a potential remedy.
Desoer and a JPMorgan Chase & Co. mortgage executive are likely to face tough questions from senators angered over allegations that banks employed so-called "robo-signers" who rapidly approved foreclosure documents without properly reviewing them. Iowa Attorney General Tom Miller is also on the witness list.
Bank of America became the nation's largest mortgage servicer in 2008 when it bought ailing Countrywide Financial Corp. It now administers about 14 million customer loans - about one in five U.S. mortgages.
More than 86 percent of Bank of America customers are current on their loans and making their payments, Desoer notes. But the bank has had to focus extensively on the portion of customers in default or struggling to make payments. Of the 14 million loans, about three-fourths are owned by investors such as Fannie Mae and Freddie Mac, complicating efforts to reach modification agreements.
As it looks to improve the modification process, the bank has assigned 140,000 customers a single case manager to handle questions, according to Desoer's testimony. Wells Fargo has said it will implement a similar approach for certain Wachovia customers as part of a settlement announced last month. The San Francisco-based bank has also said it's providing a single point of contact to customers who make new modification requests.
Among other changes, Bank of America is looking to create a "customer status checklist" that will show customers where they stand in the process. The bank also plans to double its staff that works with customers face-to-face either at Bank of America offices or alongside nonprofit groups. Other steps may come up in the bank's "constructive and continuing conversations" with Miller and other attorneys general, Desoer says.
Meanwhile, Bank of America has halted foreclosure sales in 50 states as it reviews its processes. The bank believes the basis for all of its foreclosures has been accurate, but it has identified "areas for improvement," Desoer says. The bank has changed its affidavit forms, installed extra quality control checks and changed procedures for hiring outside lawyers. "Every affidavit will be individually reviewed by the signer, properly executed and promptly notarized," she says.
Bank of America Corp. chief executive Brian Moynihan said he was surprised when the Federal Reserve Bank of New York and investors sent a letter pushing the firm to repurchase soured mortgages pooled into securities.
The bank expects to resolve the dispute, which could pressure Bank of America to foreclose on borrowers more quickly, Moynihan, 51, said Thursday in Boston at a presentation to banking analysts.
"I don't think we should be put in a position where we aren't trying to help homeowners through this strife because people want us to foreclose faster," he said.
Bank of America shares declined 4.4 percent on Oct. 19 after news of the letter signed by the New York Fed, Pacific Investment Management Co., BlackRock Inc. and others, alleging the bank's Countrywide Financial Inc. subsidiary didn't service loans properly. The New York Fed acquired mortgage debt through its 2008 rescues of Bear Stearns Cos. and American International Group Inc.
"The fact that they signed the letter from your standpoint surprised you, it surprised me, and it is a surprise to a lot of people," Moynihan said, referring to the bondholders. "We have disputes with them about other assets in those pools and we've resolved them."
Bank of America, the largest U.S. lender, has said it has formal outstanding demands from mortgage investors seeking repurchases of almost $13 billion of loans that may have failed to accurately document key data, such as income and home values.
The Charlotte-based bank is also among lenders facing being investigated by state attorneys general over its handling of foreclosures.
Moynihan said he called BlackRock Inc. CEO Larry Fink to discuss the dispute. Bank of America said Wednesday it would reduce its 34 percent stake in BlackRock, preferring to use the capital for its own businesses. The bank will remain a strategic partner of BlackRock, the world's largest asset manager, for a long time, Moynihan said.
The bank said last month it would start resubmitting foreclosure affidavits in 102,000 cases in which judgment is pending. Amid pressure from lawmakers and state officials, bankers have delayed action in order to review filings that some borrowers claim were marred by so-called robo-signing, in which employees vouched for the accuracy of court statements without personally checking loan records.
The mortgage-bond investor group including BlackRock says Bank of America's foreclosures take too long because of missing documents, processing mistakes and insufficient staffing to evaluate borrowers for loan modifications, Kathy Patrick, their lawyer at Gibbs & Bruns LLP, said Oct. 19.
Moynihan responded Thursday to a question on whether Bank of America would consider a bankruptcy of Countrywide to limit potential losses from distressed home loans. "We don't see any liability that would make us think differently about working through this in the ways we are working through this," he said.
Pajamas Media roots into FEC filings to discover that Bank of America loaned the Democratic National Committee and the Democratic Congressional Campaign Committee $32m. last month while asking for nothing more than future contributions as collateral. Such de facto mailing list valuations are an extremely flimsy basis for securing a loan. PJM asks:
Were the Bank of America deals legitimate, arms-length transactions, or were they cozy sweetheart deals in which nothing was really put up to secure a $32 million loan?
But one question not asked is the connection between the loan and Charlotte’s ongoing pursuit of the DNC’s 2012 convention. We already know that BAC CEO Brian Moynihan has been called President Obama’s favorite banker and that the bank’s exec team — like the rest of the Uptown crowd — is full-on behind landing the convention for Banktown USA. Plus we have ample local precedent for BAC throwing millions in sweetheart loans at favored endeavors — the US National Log Flume Ride and France Family Convention Center Annex being two glittering, irrefutable examples.
BAC has yet to respond to PJM inquires with details about the loans — but you know what is coming. BAC will say there is a legit business purpose to the loans and any suggestion to the contrary is counter-factual.
Shortly after Labor Day, as polls continued to sink, the Democratic National Committee (DNC) realized it needed a cash infusion for the upcoming midterm elections.
Its chairman, former Virginia Governor Tim Kaine, turned to the Bank of America to secure a $15 million revolving credit line. Then, in the middle of this month, the Democratic Congressional Campaign Committee (DCCC) got another loan from BofA for an additional $17 million.
What was their collateral? It turns out, not much.
The DNC claims their collateral was an intangible piece of property — its donor mailing list. The DCCC only cites unnamed “assets.” Neither party organization possesses real estate even close to cover the $32 million. The DNC’s headquarters is owned by another entity. Even it was put up as collateral, its market value was last estimated at only $13.7 million.
Were the Bank of America deals legitimate, arms-length transactions, or were they cozy sweetheart deals in which nothing was really put up to secure a $32 million loan?
And if it was the latter, could it be considered an illegal campaign contribution from the largest bank holding company in America?
There also is troubling evidence that two days before closing on the loan transaction, the DNC changed its own privacy provisions to allow the selling or sharing of private donor data.
BofA has been a longtime friend of Democrats. In the 2008 election cycle, BofA gave its largest single campaign contribution to then-Senator Barack Obama. According to Bloomberg News, BofA’s new CEO, Brian Moynihan, is considered Obama’s top political ally on Wall Street.
On the eve of the midterm elections, the appearance of preferential loans from cozy Wall Street bankers could play badly with the electorate. What message does a largely unsecured $32 million credit line for the Democratic Party send to thousands of cash-starved small businesses across the nation who can’t secure any credit even with tangible assets?
The findings are part of an exclusive Pajamas Media investigation.
The DNC Loan Agreement as posted online by the Federal Election Commission (FEC) and signed by former Virginia Governor Tim Kaine (D) on September 16, 2010, says the loan collateral included: “All electronic mail (‘E-mail’) addresses and other contact lists, records and other Information (electronic or otherwise) relating to contributors, supporters and subscribers owned by any of the Borrowers.” The borrowers in this case were the DNC and the DNC Services Corporation.
The loan agreement further stipulates that if the Democrats defaulted, Bank of America would be entitled to “proceeds from any fundraising activity, refunds, reimbursements, or proceeds from the rental or sale of mailing, contact or subscription lists or Information (electronic or otherwise).”
One key to understanding the problems behind the $15 million loan is determining what the donor list is actually worth. The DNC filings with the FEC do not attach any independent appraisal documents or list broker evaluations to establish the list’s fair market value.
Senator John McCain once tried to use his presidential donor list as collateral for a loan. He valued his Republican donor list as worth $3 million. The bank rejected the loan.
Trying to fix a value on an intangible mailing list is very difficult.
“Donor lists do have value, but very fleeting value,” Ken Boehm, chairman of the National Legal and Policy Center, told Pajamas Media. “Lists do deteriorate and $15 million is an awful lot of money. So if the bank ends up with the list because the party is broke, where are they going to get their money?”
A senior executive who is part of a national U.S. bank told Pajamas Media that a data list would be a weak basis for a $15 million loan. He gave his comments on the grounds that he would not be publicly identified. He said he was “somewhat skeptical of a donor list as adequate collateral for a $15 million credit line.”
But if the value is not $15 million, it could be considered a substantial campaign contribution to the Democratic National Committee. And that could be illegal.
“The DNC would have to demonstrate it’s an arms-length, commercially reasonable, properly collateralized loan,” says Cleta Mitchell, a Washington-based attorney with Foley & Lardner LLP and an expert on campaign finance law. She says there needed to be some outside way to assess or appraise the list before the line of credit could be approved. “Otherwise, it’s an illegal contribution from a national bank,” she says.
Hans von Spakovsky, a former commissioner on the Federal Election Commission, agrees. Unless the DNC or BofA conducted an independent appraisal, the loan could be considered an illegal campaign contribution. “The FEC would require an independent appraisal of the fair market value of the list that supports the amount of the loan. Otherwise as a commissioner I would consider this an illegal contribution,” he told Pajamas Media.
In 2005, ATA attorneys for direct mail pioneer Richard Viguerie told the Federal Election Commission that ATA could not get credit using its mailing lists as collateral. Concerning its own client’s many mailing lists, ATA told the FEC that as a standard business practice, “the collateral is the mailing lists. Banks have informed ATA that this is not the type of collateral that banks use to extend credit.”
Without independent documentation, Mitchell told Pajamas Media, “you would never be able to say that their mailing list was worth $15 million. A bank would have to discount the value. So a bank would have to say it was worth at least twice that to get to $15 million.” That, she emphasizes, does require an arms-length appraisal and documentation.
Pajamas Media contacted both the Democratic National Committee and Bank of America for comment and details surrounding the transaction. As of this posting, the DNC has not replied to our inquiries. A communications person from BofA did return our phone call but could not respond to our query. [Update: They did after the piece ran; see addendum below.] She promised she would get someone to respond.
Boehm and Mitchell point out that many campaigns frequently take out short-term, temporary loans as bridge loans until new contributions come in. Most promise to pay it off before the election. The BofA terms are different.
The bank states that the first payment of principal will not be required until February 28, 2011, well after the November elections. Final payment for the debt will not be required until December 2011. What if the party found itself in deep debt after losing one or both houses of Congress?
As of October 13, the DNC reported $13.5 million of cash on hand with debts of $7.7 million. Their total worth was $5.8 million with three more weeks of campaigning ahead. (The Democratic Congressional Campaign Committee took out an additional $17 million credit line on October 21.)
There is also the issue of whether on the eve of the loan, the Democrats altered their own privacy policy about sharing private donor data. On September 14, two days before executing the loan, the DNC changed its privacy policy web page. The site initially states that their privacy policy is not to share private data: “It is our policy not to share the personal information we collect from you.”
However, the site adds in its last line that indeed it might share private information if it is the result of an “asset sale or in any other situation where personal information may be disclosed or transferred as one of the assets of the DNC.”
Is it simply a coincidence that the last item of this section acknowledges the DNC might share private information as a result of an asset sale to a third party? Or was it added to accommodate the new collateralized loan?
Other Democratic Party web sites strictly forbid the sharing of their mailing lists unless authorized by the individual. For example, one local Democratic website directly state to its supporters: “We will not give, sell or rent your email address to any other organization unless you specifically authorize us.”
The Democrats’ long-time sweetheart relationship with the banking world and with the Bank of America in particular creates the appearance of an insider deal.
BofA was very generous to Barack Obama when he ran for President. Campaign finance records show that in the 2008 election cycle, Senator Barack Obama was the top recipient of Bank of America campaign donations, reaping $421,000.
BofA’s new CEO, who took over from embattled Kenneth Lewis, is considered one of the Obama administration’s top Wall Street allies on a whole host of issues, from the creation of a consumer regulatory agency to the defense of the administration’s home mortgage fiascoes.
Here’s what Bloomberg News reported about the Moynihan-White House axis last May when he was the number two at BofA:
“He has been willing to speak out bravely in his industry on the need for reform measures,” says Valerie Jarrett, Obama’s liaison to corporate America who has met with Moynihan at the White House several times. “And he has been willing to come to Washington and roll up his sleeves and work on the issue.”
The history between BofA and Democrats goes back years. One highly publicized political scandal linked the bank and Democrats to the subprime mortgage giant Countrywide Financial, which BofA acquired more than two years ago. Countrywide CEO Angelo Mozilo gave preferential below market mortgages to leading Democrats like Connecticut Senator Chris Dodd, the chairman of the Senate Banking Committee. After the disclosure of the mortgage favors, both Dodd and Senator Kent Conrad (D-SD) decided not to run for re-election.
Dodd and other Washington Democrats belonged to a group of VIP loan recipients known in company documents and emails as “FOAs” — Friends of Angelo, a reference to Angelo Mozilo.
“This (type of loan) isn’t something that’s generally offered to the general public, but it looks like it is something of a sweetheart deal,” observes Boehm about the new BofA credit line to the DNC. “Usually when you see this it is banks with a relationship with candidates and we see that all over the place. We saw that with Countrywide,” he told Pajamas Media.
Allowing third parties access to donor mailing lists as part of financial transactions can be tricky business. For years Democratic activists hounded Republican Sen. John Ashcroft about the third party use of his mailing list. The Federal Election Commission fined his campaign $37,000.
The issue may not play well with voters either. Getting an easy line of credit may not sit well with cash-starved small businesses that have sought loans during the bad economy — even when they tried to collateralize it with real, not abstract assets.
The question is, will the DNC come clean and open their books on the transaction?
Update:
Jefferson George, a Bank of America spokesman, responds:
First, the answer to the question raised in the headline – “Did the DNC Get an Illegal Campaign Loan from Bank of America?” – is no. We follow all Federal Election Commission guidelines in our financial transactions with political parties and apply the same underwriting standards to these organizations as we do to any other institutional borrower. We also work closely with outside campaign finance legal experts to structure and document these transactions. These agreements are required to be arms-length transactions, and we are very careful with how we underwrite these loans.
As I mentioned, we have always had relationships with committees that represent political parties on both sides of the aisle. Our banking relationship with the Democratic Party dates back more than 30 years, well before the current administration. We also have provided loans for Republican candidates and committees. For instance, we provided financing for Mitt Romney’s 2008 presidential campaign.
Regarding the loans to the DNC and DCCC, due to client confidentiality obligations, we can’t discuss specific loans publicly beyond what is disclosed by the FEC, and we would refer you to those individual organizations. We can say, however, that collateral for these types of loans may include many things, and donor lists usually are insignificant compared such security measures as blanket liens against all assets, including accounts receivable. This also assumes a client doesn’t have adequate cash flow from the collection of contributions. Other factors in considering a loan include a client’s history with repaying loans on time or ahead of schedule.
Update (5:10 PM PDT):
More from Jefferson:
Thanks for this. Saw the updated story. One clarification, and it was my error: We didn’t provide financing for Romney. Rather, we had — and have — a banking relationship, handling deposits and providing other cash management services. And that relationship is still active.
Update (8:00 PM PDT):
Richard Pollack adds:
The nub of the story is that Bank of America refuses to confirm that an independent appraisal was done for the issuance of two huge loans to the Democrats totaling $32 million. While the bank might wish to invoke confidentiality, in the post-partisan era promised by President Obama, transparency around this particular loan is vital. This is especially true if there are allegations of violations of law.
The scope of the BofA small business loan to the Democrats is breathtaking. According to CNN/Money, in 2009, the bank issued 308 loans to small businesses totaling $17.6 million and in 2010 it issued 185 loans totaling $22.8 million. So the size of the Democrats’ two loans dwarfs all loans to small businesses in each calendar year. I wonder how credit-starved small business owners would feel about these Democrat loans tonight.
In that CNN/Money article, Mr. George was interviewed, saying, “Among those seeking loans, the creditworthiness of many businesses has changed. Cash flow — the most important factor — often is down. The value of collateral, such as real estate or equipment, has decreased.”
Mr. George had it right. Collateral is everything. The public has a right to know what is the collateral behind the $32 million in loans. Otherwise, it can be regarded as a gift, and patently illegal under federal campaign finance laws.
(Update: 7:54 AM PDT, 10/28):
More from Jefferson:
Your last update at 8:00 pm ET is incorrect. The numbers you cite from the CNN/Money story are for SBA loans. That was clearly stated in the story, and SBA lending is a very small percentage of Bank of America’s total lending to small businesses. In 2009, Bank of America loaned $16.5 billion to small businesses. Through the third quarter of 2010, Bank of America loaned $13.9 billion to small businesses.
Beyond direct lending, Bank of America works with Community Development Financial Institutions (CDFIs) to provide financing and technical assistance to businesses that don’t qualify for traditional financing. As the leading financial institution supporting CDFIs, the bank provides $1 billion of capital – including more than $200 million to CDFIs that finance small businesses in lower-income communities. Bank of America also recently launched a grant program for CDFIs and other nonprofit lenders, aimed at unlocking $100 million in low-cost, long-term capital for small and rural businesses. To date, the bank has awarded grants that allowed CDFIs to access nearly $27.5 million in lending capital.
In addition, Bank of America has made a commitment to increase spending with small, medium-sized and diverse businesses. The bank’s pledge to purchase $10 billion in products and services from those suppliers over the next five years will provide much-needed income for those businesses. Finally, Bank of America recently announced it will hire more than 1,000 Small Business Bankers by early 2012. Based in communities across the U.S., these bankers will consult with small business owners, spend time at their offices and assess their companies’ deposit, credit and cash management needs.
(Update:7:56 AM PDT, 10/28): Richard Pollock responds:
Thank you for your additional comments on behalf of Bank of America. We will post them in full.
As for the substance of your comments:
Actually, I understated the case in your favor by citing the CNN/Money figures. These loans are not to your smallest business customers, which are really hurting in the credit crunch. It’s your biggest SBA (7) loan portfolio, which is the government backed loan program for small businesses through the Small Business Administration.
Your $32 million dwarfs those loans, many of which have been in trouble because of deterioration in collateralized assets. Your former CEO, Ken Lewis, has admitted this repeatedly. That’s why more conservative rules need to be applied in this economic downturn, not more relaxed standards. The Democratic National Committee and the DCCC will continue. No doubt. But its indebtedness after its most expensive and probably losing mid-term election cycle may put it in a precarious state until the presidential campaign. If may twist on an old financial cautionary warning: past performance is not a guarantee of future results. In 2010, the DNC and the DCCC may face substantial indebtedness and will have to repay the loan through 2012 as well as re-build their donor base.
I strongly recommend that your urge your clients, the DNC and DCCC, to be transparent and back up the collateral for their $32 million lines of credit. Failure to do so will only give the public the impression that there was a sweetheart deal here, and perhaps even the appearance of unlawful activity as well.
Bank of America Corp. chief executive Brian Moynihan said he was surprised when the Federal Reserve Bank of New York and investors sent a letter pushing the firm to repurchase soured mortgages pooled into securities.
The bank expects to resolve the dispute, which could pressure Bank of America to foreclose on borrowers more quickly, Moynihan, 51, said Thursday in Boston at a presentation to banking analysts.
"I don't think we should be put in a position where we aren't trying to help homeowners through this strife because people want us to foreclose faster," he said.
Bank of America shares declined 4.4 percent on Oct. 19 after news of the letter signed by the New York Fed, Pacific Investment Management Co., BlackRock Inc. and others, alleging the bank's Countrywide Financial Inc. subsidiary didn't service loans properly. The New York Fed acquired mortgage debt through its 2008 rescues of Bear Stearns Cos. and American International Group Inc.
"The fact that they signed the letter from your standpoint surprised you, it surprised me, and it is a surprise to a lot of people," Moynihan said, referring to the bondholders. "We have disputes with them about other assets in those pools and we've resolved them."
Bank of America, the largest U.S. lender, has said it has formal outstanding demands from mortgage investors seeking repurchases of almost $13 billion of loans that may have failed to accurately document key data, such as income and home values.
The Charlotte-based bank is also among lenders facing being investigated by state attorneys general over its handling of foreclosures.
Moynihan said he called BlackRock Inc. CEO Larry Fink to discuss the dispute. Bank of America said Wednesday it would reduce its 34 percent stake in BlackRock, preferring to use the capital for its own businesses. The bank will remain a strategic partner of BlackRock, the world's largest asset manager, for a long time, Moynihan said.
The bank said last month it would start resubmitting foreclosure affidavits in 102,000 cases in which judgment is pending. Amid pressure from lawmakers and state officials, bankers have delayed action in order to review filings that some borrowers claim were marred by so-called robo-signing, in which employees vouched for the accuracy of court statements without personally checking loan records.
The mortgage-bond investor group including BlackRock says Bank of America's foreclosures take too long because of missing documents, processing mistakes and insufficient staffing to evaluate borrowers for loan modifications, Kathy Patrick, their lawyer at Gibbs & Bruns LLP, said Oct. 19.
Moynihan responded Thursday to a question on whether Bank of America would consider a bankruptcy of Countrywide to limit potential losses from distressed home loans. "We don't see any liability that would make us think differently about working through this in the ways we are working through this," he said.
Pajamas Media roots into FEC filings to discover that Bank of America loaned the Democratic National Committee and the Democratic Congressional Campaign Committee $32m. last month while asking for nothing more than future contributions as collateral. Such de facto mailing list valuations are an extremely flimsy basis for securing a loan. PJM asks:
Were the Bank of America deals legitimate, arms-length transactions, or were they cozy sweetheart deals in which nothing was really put up to secure a $32 million loan?
But one question not asked is the connection between the loan and Charlotte’s ongoing pursuit of the DNC’s 2012 convention. We already know that BAC CEO Brian Moynihan has been called President Obama’s favorite banker and that the bank’s exec team — like the rest of the Uptown crowd — is full-on behind landing the convention for Banktown USA. Plus we have ample local precedent for BAC throwing millions in sweetheart loans at favored endeavors — the US National Log Flume Ride and France Family Convention Center Annex being two glittering, irrefutable examples.
BAC has yet to respond to PJM inquires with details about the loans — but you know what is coming. BAC will say there is a legit business purpose to the loans and any suggestion to the contrary is counter-factual.
Shortly after Labor Day, as polls continued to sink, the Democratic National Committee (DNC) realized it needed a cash infusion for the upcoming midterm elections.
Its chairman, former Virginia Governor Tim Kaine, turned to the Bank of America to secure a $15 million revolving credit line. Then, in the middle of this month, the Democratic Congressional Campaign Committee (DCCC) got another loan from BofA for an additional $17 million.
What was their collateral? It turns out, not much.
The DNC claims their collateral was an intangible piece of property — its donor mailing list. The DCCC only cites unnamed “assets.” Neither party organization possesses real estate even close to cover the $32 million. The DNC’s headquarters is owned by another entity. Even it was put up as collateral, its market value was last estimated at only $13.7 million.
Were the Bank of America deals legitimate, arms-length transactions, or were they cozy sweetheart deals in which nothing was really put up to secure a $32 million loan?
And if it was the latter, could it be considered an illegal campaign contribution from the largest bank holding company in America?
There also is troubling evidence that two days before closing on the loan transaction, the DNC changed its own privacy provisions to allow the selling or sharing of private donor data.
BofA has been a longtime friend of Democrats. In the 2008 election cycle, BofA gave its largest single campaign contribution to then-Senator Barack Obama. According to Bloomberg News, BofA’s new CEO, Brian Moynihan, is considered Obama’s top political ally on Wall Street.
On the eve of the midterm elections, the appearance of preferential loans from cozy Wall Street bankers could play badly with the electorate. What message does a largely unsecured $32 million credit line for the Democratic Party send to thousands of cash-starved small businesses across the nation who can’t secure any credit even with tangible assets?
The findings are part of an exclusive Pajamas Media investigation.
The DNC Loan Agreement as posted online by the Federal Election Commission (FEC) and signed by former Virginia Governor Tim Kaine (D) on September 16, 2010, says the loan collateral included: “All electronic mail (‘E-mail’) addresses and other contact lists, records and other Information (electronic or otherwise) relating to contributors, supporters and subscribers owned by any of the Borrowers.” The borrowers in this case were the DNC and the DNC Services Corporation.
The loan agreement further stipulates that if the Democrats defaulted, Bank of America would be entitled to “proceeds from any fundraising activity, refunds, reimbursements, or proceeds from the rental or sale of mailing, contact or subscription lists or Information (electronic or otherwise).”
One key to understanding the problems behind the $15 million loan is determining what the donor list is actually worth. The DNC filings with the FEC do not attach any independent appraisal documents or list broker evaluations to establish the list’s fair market value.
Senator John McCain once tried to use his presidential donor list as collateral for a loan. He valued his Republican donor list as worth $3 million. The bank rejected the loan.
Trying to fix a value on an intangible mailing list is very difficult.
“Donor lists do have value, but very fleeting value,” Ken Boehm, chairman of the National Legal and Policy Center, told Pajamas Media. “Lists do deteriorate and $15 million is an awful lot of money. So if the bank ends up with the list because the party is broke, where are they going to get their money?”
A senior executive who is part of a national U.S. bank told Pajamas Media that a data list would be a weak basis for a $15 million loan. He gave his comments on the grounds that he would not be publicly identified. He said he was “somewhat skeptical of a donor list as adequate collateral for a $15 million credit line.”
But if the value is not $15 million, it could be considered a substantial campaign contribution to the Democratic National Committee. And that could be illegal.
“The DNC would have to demonstrate it’s an arms-length, commercially reasonable, properly collateralized loan,” says Cleta Mitchell, a Washington-based attorney with Foley & Lardner LLP and an expert on campaign finance law. She says there needed to be some outside way to assess or appraise the list before the line of credit could be approved. “Otherwise, it’s an illegal contribution from a national bank,” she says.
Hans von Spakovsky, a former commissioner on the Federal Election Commission, agrees. Unless the DNC or BofA conducted an independent appraisal, the loan could be considered an illegal campaign contribution. “The FEC would require an independent appraisal of the fair market value of the list that supports the amount of the loan. Otherwise as a commissioner I would consider this an illegal contribution,” he told Pajamas Media.
In 2005, ATA attorneys for direct mail pioneer Richard Viguerie told the Federal Election Commission that ATA could not get credit using its mailing lists as collateral. Concerning its own client’s many mailing lists, ATA told the FEC that as a standard business practice, “the collateral is the mailing lists. Banks have informed ATA that this is not the type of collateral that banks use to extend credit.”
Without independent documentation, Mitchell told Pajamas Media, “you would never be able to say that their mailing list was worth $15 million. A bank would have to discount the value. So a bank would have to say it was worth at least twice that to get to $15 million.” That, she emphasizes, does require an arms-length appraisal and documentation.
Pajamas Media contacted both the Democratic National Committee and Bank of America for comment and details surrounding the transaction. As of this posting, the DNC has not replied to our inquiries. A communications person from BofA did return our phone call but could not respond to our query. [Update: They did after the piece ran; see addendum below.] She promised she would get someone to respond.
Boehm and Mitchell point out that many campaigns frequently take out short-term, temporary loans as bridge loans until new contributions come in. Most promise to pay it off before the election. The BofA terms are different.
The bank states that the first payment of principal will not be required until February 28, 2011, well after the November elections. Final payment for the debt will not be required until December 2011. What if the party found itself in deep debt after losing one or both houses of Congress?
As of October 13, the DNC reported $13.5 million of cash on hand with debts of $7.7 million. Their total worth was $5.8 million with three more weeks of campaigning ahead. (The Democratic Congressional Campaign Committee took out an additional $17 million credit line on October 21.)
There is also the issue of whether on the eve of the loan, the Democrats altered their own privacy policy about sharing private donor data. On September 14, two days before executing the loan, the DNC changed its privacy policy web page. The site initially states that their privacy policy is not to share private data: “It is our policy not to share the personal information we collect from you.”
However, the site adds in its last line that indeed it might share private information if it is the result of an “asset sale or in any other situation where personal information may be disclosed or transferred as one of the assets of the DNC.”
Is it simply a coincidence that the last item of this section acknowledges the DNC might share private information as a result of an asset sale to a third party? Or was it added to accommodate the new collateralized loan?
Other Democratic Party web sites strictly forbid the sharing of their mailing lists unless authorized by the individual. For example, one local Democratic website directly state to its supporters: “We will not give, sell or rent your email address to any other organization unless you specifically authorize us.”
The Democrats’ long-time sweetheart relationship with the banking world and with the Bank of America in particular creates the appearance of an insider deal.
BofA was very generous to Barack Obama when he ran for President. Campaign finance records show that in the 2008 election cycle, Senator Barack Obama was the top recipient of Bank of America campaign donations, reaping $421,000.
BofA’s new CEO, who took over from embattled Kenneth Lewis, is considered one of the Obama administration’s top Wall Street allies on a whole host of issues, from the creation of a consumer regulatory agency to the defense of the administration’s home mortgage fiascoes.
Here’s what Bloomberg News reported about the Moynihan-White House axis last May when he was the number two at BofA:
“He has been willing to speak out bravely in his industry on the need for reform measures,” says Valerie Jarrett, Obama’s liaison to corporate America who has met with Moynihan at the White House several times. “And he has been willing to come to Washington and roll up his sleeves and work on the issue.”
The history between BofA and Democrats goes back years. One highly publicized political scandal linked the bank and Democrats to the subprime mortgage giant Countrywide Financial, which BofA acquired more than two years ago. Countrywide CEO Angelo Mozilo gave preferential below market mortgages to leading Democrats like Connecticut Senator Chris Dodd, the chairman of the Senate Banking Committee. After the disclosure of the mortgage favors, both Dodd and Senator Kent Conrad (D-SD) decided not to run for re-election.
Dodd and other Washington Democrats belonged to a group of VIP loan recipients known in company documents and emails as “FOAs” — Friends of Angelo, a reference to Angelo Mozilo.
“This (type of loan) isn’t something that’s generally offered to the general public, but it looks like it is something of a sweetheart deal,” observes Boehm about the new BofA credit line to the DNC. “Usually when you see this it is banks with a relationship with candidates and we see that all over the place. We saw that with Countrywide,” he told Pajamas Media.
Allowing third parties access to donor mailing lists as part of financial transactions can be tricky business. For years Democratic activists hounded Republican Sen. John Ashcroft about the third party use of his mailing list. The Federal Election Commission fined his campaign $37,000.
The issue may not play well with voters either. Getting an easy line of credit may not sit well with cash-starved small businesses that have sought loans during the bad economy — even when they tried to collateralize it with real, not abstract assets.
The question is, will the DNC come clean and open their books on the transaction?
Update:
Jefferson George, a Bank of America spokesman, responds:
First, the answer to the question raised in the headline – “Did the DNC Get an Illegal Campaign Loan from Bank of America?” – is no. We follow all Federal Election Commission guidelines in our financial transactions with political parties and apply the same underwriting standards to these organizations as we do to any other institutional borrower. We also work closely with outside campaign finance legal experts to structure and document these transactions. These agreements are required to be arms-length transactions, and we are very careful with how we underwrite these loans.
As I mentioned, we have always had relationships with committees that represent political parties on both sides of the aisle. Our banking relationship with the Democratic Party dates back more than 30 years, well before the current administration. We also have provided loans for Republican candidates and committees. For instance, we provided financing for Mitt Romney’s 2008 presidential campaign.
Regarding the loans to the DNC and DCCC, due to client confidentiality obligations, we can’t discuss specific loans publicly beyond what is disclosed by the FEC, and we would refer you to those individual organizations. We can say, however, that collateral for these types of loans may include many things, and donor lists usually are insignificant compared such security measures as blanket liens against all assets, including accounts receivable. This also assumes a client doesn’t have adequate cash flow from the collection of contributions. Other factors in considering a loan include a client’s history with repaying loans on time or ahead of schedule.
Update (5:10 PM PDT):
More from Jefferson:
Thanks for this. Saw the updated story. One clarification, and it was my error: We didn’t provide financing for Romney. Rather, we had — and have — a banking relationship, handling deposits and providing other cash management services. And that relationship is still active.
Update (8:00 PM PDT):
Richard Pollack adds:
The nub of the story is that Bank of America refuses to confirm that an independent appraisal was done for the issuance of two huge loans to the Democrats totaling $32 million. While the bank might wish to invoke confidentiality, in the post-partisan era promised by President Obama, transparency around this particular loan is vital. This is especially true if there are allegations of violations of law.
The scope of the BofA small business loan to the Democrats is breathtaking. According to CNN/Money, in 2009, the bank issued 308 loans to small businesses totaling $17.6 million and in 2010 it issued 185 loans totaling $22.8 million. So the size of the Democrats’ two loans dwarfs all loans to small businesses in each calendar year. I wonder how credit-starved small business owners would feel about these Democrat loans tonight.
In that CNN/Money article, Mr. George was interviewed, saying, “Among those seeking loans, the creditworthiness of many businesses has changed. Cash flow — the most important factor — often is down. The value of collateral, such as real estate or equipment, has decreased.”
Mr. George had it right. Collateral is everything. The public has a right to know what is the collateral behind the $32 million in loans. Otherwise, it can be regarded as a gift, and patently illegal under federal campaign finance laws.
(Update: 7:54 AM PDT, 10/28):
More from Jefferson:
Your last update at 8:00 pm ET is incorrect. The numbers you cite from the CNN/Money story are for SBA loans. That was clearly stated in the story, and SBA lending is a very small percentage of Bank of America’s total lending to small businesses. In 2009, Bank of America loaned $16.5 billion to small businesses. Through the third quarter of 2010, Bank of America loaned $13.9 billion to small businesses.
Beyond direct lending, Bank of America works with Community Development Financial Institutions (CDFIs) to provide financing and technical assistance to businesses that don’t qualify for traditional financing. As the leading financial institution supporting CDFIs, the bank provides $1 billion of capital – including more than $200 million to CDFIs that finance small businesses in lower-income communities. Bank of America also recently launched a grant program for CDFIs and other nonprofit lenders, aimed at unlocking $100 million in low-cost, long-term capital for small and rural businesses. To date, the bank has awarded grants that allowed CDFIs to access nearly $27.5 million in lending capital.
In addition, Bank of America has made a commitment to increase spending with small, medium-sized and diverse businesses. The bank’s pledge to purchase $10 billion in products and services from those suppliers over the next five years will provide much-needed income for those businesses. Finally, Bank of America recently announced it will hire more than 1,000 Small Business Bankers by early 2012. Based in communities across the U.S., these bankers will consult with small business owners, spend time at their offices and assess their companies’ deposit, credit and cash management needs.
(Update:7:56 AM PDT, 10/28): Richard Pollock responds:
Thank you for your additional comments on behalf of Bank of America. We will post them in full.
As for the substance of your comments:
Actually, I understated the case in your favor by citing the CNN/Money figures. These loans are not to your smallest business customers, which are really hurting in the credit crunch. It’s your biggest SBA (7) loan portfolio, which is the government backed loan program for small businesses through the Small Business Administration.
Your $32 million dwarfs those loans, many of which have been in trouble because of deterioration in collateralized assets. Your former CEO, Ken Lewis, has admitted this repeatedly. That’s why more conservative rules need to be applied in this economic downturn, not more relaxed standards. The Democratic National Committee and the DCCC will continue. No doubt. But its indebtedness after its most expensive and probably losing mid-term election cycle may put it in a precarious state until the presidential campaign. If may twist on an old financial cautionary warning: past performance is not a guarantee of future results. In 2010, the DNC and the DCCC may face substantial indebtedness and will have to repay the loan through 2012 as well as re-build their donor base.
I strongly recommend that your urge your clients, the DNC and DCCC, to be transparent and back up the collateral for their $32 million lines of credit. Failure to do so will only give the public the impression that there was a sweetheart deal here, and perhaps even the appearance of unlawful activity as well.
It was only last April that Bank of America Corp. was making fools out of the doomsayers who had called for its nationalization a year earlier. Taxpayers had gotten their bailout cash back. Investors who bought its shares at the bottom were making a killing. Government leaders lauded the company’s rescues, both of them, as a great success.
A member of the Troubled Asset Relief Program’s oversight panel, AFL-CIO attorney Damon Silvers, openly worried at a hearing last week about the risk that Bank of America might need another bailout.
A few more months like the last one, and we may be wishing Bank of America had never returned its $45 billion of TARP money.
You wouldn’t know there’s anything wrong with Bank of America by an initial look at its balance sheet. The company showed common shareholder equity, or book value, of $212.4 billion as of Sept. 30. And its regulatory capital ratios have risen steadily throughout the year.
Tipping Point
Judging by its shrinking stock price, though, investors are acting as if Bank of America is near a tipping point. Its market capitalization stands at $115.6 billion, or 54 percent of book value. That’s the second-lowest price-to-book ratio among the 24 companies in the KBW Bank Index, and well below the 76 percent ratio the company was at in October 2008 when it landed its first round of TARP dough. Put another way, the market is saying there’s a $96.8 billion hole in Bank of America’s balance sheet.
When I asked Jerry Dubrowski, a Bank of America spokesman, about the disparity, he said: “I’m not going to comment on the book value and the stock price.”
It may be the shares are a bargain at $11.52, if the company’s books are right. Another plausible scenario is that Bank of America’s management, led by Chief Executive Officer Brian Moynihan, has lost so much credibility with investors that the stock’s decline might start feeding on itself.
The problem for anyone trying to analyze Bank of America’s $2.3 trillion balance sheet is that it’s largely impenetrable. Some portions, though, are so delusional that they invite laughter. Consider, for instance, the way the company continues to account for its acquisition of Countrywide Financial, the disastrous subprime lender at the center of the housing bust, which it bought for $4.2 billion in July 2008.
Goodwill Purchase
Here’s how Bank of America allocated the purchase price for that deal. First, it determined that the fair value of the liabilities at Countrywide exceeded the mortgage lender’s assets by $200 million. Then it recorded $4.4 billion of goodwill, a ledger entry representing the difference between Countrywide’s net asset value and the purchase price.
That’s right. Countrywide’s goodwill supposedly was worth more than Countrywide itself. In other words, Bank of America paid $4.2 billion for the company, even though it thought the value there was less than zero.
Since completing that acquisition, Bank of America has dropped the Countrywide brand. The company’s home-loan division has reported $13.5 billion of pretax losses. Yet Bank of America still hasn’t written off any of its Countrywide goodwill.
Dubrowski, the company spokesman, declined to comment when I asked him why not. In its latest quarterly report with the SEC, Bank of America said it had determined the asset wasn’t impaired. It might as well be telling the public not to believe any of the numbers on its financial statements.
No Surprise
Combine that with Bank of America’s reaction to the robo- signer scandal. (Working on it! Wait, halt Foreclosure sales! No, restart them! Whoops, still checking records!) Add in the $141.6 billion of home-equity loans on Bank of America’s books, the real value of which is unknown. And it should be no surprise that the company’s stock price has been plunging.
So, does Bank of America need to issue new common stock to raise capital? Its executives say no. They point to the usual regulatory benchmarks, as well as their own calculations of tangible common equity. This is a bare-bones capital gauge, showing a company’s ability to absorb future losses, which excludes preferred stock and most intangible assets.
Using Bank of America’s $129.5 billion figure for tangible common equity, though, that’s still about $14 billion more than the company’s market cap. So the market isn’t just discounting the intangibles, most of which don’t count in regulatory capital. Investors are wary of the company’s other numbers, too.
Artifice of Strength
The tough part for Bank of America executives is that the company’s future may be out of their hands. Writing off more worthless assets or boosting reserves for future losses might help their credibility. (The bank wrote off $10.4 billion of goodwill unrelated to Countrywide last quarter.) Or, the market might perceive such moves as a sign that the artifice of strength is broken. It’s hard to tell.
As for the government’s too-big-to-fail guarantee, it’s probably still there. But who knows? Republicans have won back the House. The answer is up in the air.
The only certainty is there is none, aside from the knowledge that Bank of America’s top executives have no idea what goes on inside the bowels of their company. For all we know the stock could double, or be a donut. The fate of the financial system hangs in the balance. Once again, we’re all on the hook.
Pajamas Media roots into FEC filings to discover that Bank of America loaned the Democratic National Committee and the Democratic Congressional Campaign Committee $32m. last month while asking for nothing more than future contributions as collateral. Such de facto mailing list valuations are an extremely flimsy basis for securing a loan. PJM asks:
Were the Bank of America deals legitimate, arms-length transactions, or were they cozy sweetheart deals in which nothing was really put up to secure a $32 million loan?
But one question not asked is the connection between the loan and Charlotte’s ongoing pursuit of the DNC’s 2012 convention. We already know that BAC CEO Brian Moynihan has been called President Obama’s favorite banker and that the bank’s exec team — like the rest of the Uptown crowd — is full-on behind landing the convention for Banktown USA. Plus we have ample local precedent for BAC throwing millions in sweetheart loans at favored endeavors — the US National Log Flume Ride and France Family Convention Center Annex being two glittering, irrefutable examples.
BAC has yet to respond to PJM inquires with details about the loans — but you know what is coming. BAC will say there is a legit business purpose to the loans and any suggestion to the contrary is counter-factual.
Shortly after Labor Day, as polls continued to sink, the Democratic National Committee (DNC) realized it needed a cash infusion for the upcoming midterm elections.
Its chairman, former Virginia Governor Tim Kaine, turned to the Bank of America to secure a $15 million revolving credit line. Then, in the middle of this month, the Democratic Congressional Campaign Committee (DCCC) got another loan from BofA for an additional $17 million.
What was their collateral? It turns out, not much.
The DNC claims their collateral was an intangible piece of property — its donor mailing list. The DCCC only cites unnamed “assets.” Neither party organization possesses real estate even close to cover the $32 million. The DNC’s headquarters is owned by another entity. Even it was put up as collateral, its market value was last estimated at only $13.7 million.
Were the Bank of America deals legitimate, arms-length transactions, or were they cozy sweetheart deals in which nothing was really put up to secure a $32 million loan?
And if it was the latter, could it be considered an illegal campaign contribution from the largest bank holding company in America?
There also is troubling evidence that two days before closing on the loan transaction, the DNC changed its own privacy provisions to allow the selling or sharing of private donor data.
BofA has been a longtime friend of Democrats. In the 2008 election cycle, BofA gave its largest single campaign contribution to then-Senator Barack Obama. According to Bloomberg News, BofA’s new CEO, Brian Moynihan, is considered Obama’s top political ally on Wall Street.
On the eve of the midterm elections, the appearance of preferential loans from cozy Wall Street bankers could play badly with the electorate. What message does a largely unsecured $32 million credit line for the Democratic Party send to thousands of cash-starved small businesses across the nation who can’t secure any credit even with tangible assets?
The findings are part of an exclusive Pajamas Media investigation.
The DNC Loan Agreement as posted online by the Federal Election Commission (FEC) and signed by former Virginia Governor Tim Kaine (D) on September 16, 2010, says the loan collateral included: “All electronic mail (‘E-mail’) addresses and other contact lists, records and other Information (electronic or otherwise) relating to contributors, supporters and subscribers owned by any of the Borrowers.” The borrowers in this case were the DNC and the DNC Services Corporation.
The loan agreement further stipulates that if the Democrats defaulted, Bank of America would be entitled to “proceeds from any fundraising activity, refunds, reimbursements, or proceeds from the rental or sale of mailing, contact or subscription lists or Information (electronic or otherwise).”
One key to understanding the problems behind the $15 million loan is determining what the donor list is actually worth. The DNC filings with the FEC do not attach any independent appraisal documents or list broker evaluations to establish the list’s fair market value.
Senator John McCain once tried to use his presidential donor list as collateral for a loan. He valued his Republican donor list as worth $3 million. The bank rejected the loan.
Trying to fix a value on an intangible mailing list is very difficult.
“Donor lists do have value, but very fleeting value,” Ken Boehm, chairman of the National Legal and Policy Center, told Pajamas Media. “Lists do deteriorate and $15 million is an awful lot of money. So if the bank ends up with the list because the party is broke, where are they going to get their money?”
A senior executive who is part of a national U.S. bank told Pajamas Media that a data list would be a weak basis for a $15 million loan. He gave his comments on the grounds that he would not be publicly identified. He said he was “somewhat skeptical of a donor list as adequate collateral for a $15 million credit line.”
But if the value is not $15 million, it could be considered a substantial campaign contribution to the Democratic National Committee. And that could be illegal.
“The DNC would have to demonstrate it’s an arms-length, commercially reasonable, properly collateralized loan,” says Cleta Mitchell, a Washington-based attorney with Foley & Lardner LLP and an expert on campaign finance law. She says there needed to be some outside way to assess or appraise the list before the line of credit could be approved. “Otherwise, it’s an illegal contribution from a national bank,” she says.
Hans von Spakovsky, a former commissioner on the Federal Election Commission, agrees. Unless the DNC or BofA conducted an independent appraisal, the loan could be considered an illegal campaign contribution. “The FEC would require an independent appraisal of the fair market value of the list that supports the amount of the loan. Otherwise as a commissioner I would consider this an illegal contribution,” he told Pajamas Media.
In 2005, ATA attorneys for direct mail pioneer Richard Viguerie told the Federal Election Commission that ATA could not get credit using its mailing lists as collateral. Concerning its own client’s many mailing lists, ATA told the FEC that as a standard business practice, “the collateral is the mailing lists. Banks have informed ATA that this is not the type of collateral that banks use to extend credit.”
Without independent documentation, Mitchell told Pajamas Media, “you would never be able to say that their mailing list was worth $15 million. A bank would have to discount the value. So a bank would have to say it was worth at least twice that to get to $15 million.” That, she emphasizes, does require an arms-length appraisal and documentation.
Pajamas Media contacted both the Democratic National Committee and Bank of America for comment and details surrounding the transaction. As of this posting, the DNC has not replied to our inquiries. A communications person from BofA did return our phone call but could not respond to our query. [Update: They did after the piece ran; see addendum below.] She promised she would get someone to respond.
Boehm and Mitchell point out that many campaigns frequently take out short-term, temporary loans as bridge loans until new contributions come in. Most promise to pay it off before the election. The BofA terms are different.
The bank states that the first payment of principal will not be required until February 28, 2011, well after the November elections. Final payment for the debt will not be required until December 2011. What if the party found itself in deep debt after losing one or both houses of Congress?
As of October 13, the DNC reported $13.5 million of cash on hand with debts of $7.7 million. Their total worth was $5.8 million with three more weeks of campaigning ahead. (The Democratic Congressional Campaign Committee took out an additional $17 million credit line on October 21.)
There is also the issue of whether on the eve of the loan, the Democrats altered their own privacy policy about sharing private donor data. On September 14, two days before executing the loan, the DNC changed its privacy policy web page. The site initially states that their privacy policy is not to share private data: “It is our policy not to share the personal information we collect from you.”
However, the site adds in its last line that indeed it might share private information if it is the result of an “asset sale or in any other situation where personal information may be disclosed or transferred as one of the assets of the DNC.”
Is it simply a coincidence that the last item of this section acknowledges the DNC might share private information as a result of an asset sale to a third party? Or was it added to accommodate the new collateralized loan?
Other Democratic Party web sites strictly forbid the sharing of their mailing lists unless authorized by the individual. For example, one local Democratic website directly state to its supporters: “We will not give, sell or rent your email address to any other organization unless you specifically authorize us.”
The Democrats’ long-time sweetheart relationship with the banking world and with the Bank of America in particular creates the appearance of an insider deal.
BofA was very generous to Barack Obama when he ran for President. Campaign finance records show that in the 2008 election cycle, Senator Barack Obama was the top recipient of Bank of America campaign donations, reaping $421,000.
BofA’s new CEO, who took over from embattled Kenneth Lewis, is considered one of the Obama administration’s top Wall Street allies on a whole host of issues, from the creation of a consumer regulatory agency to the defense of the administration’s home mortgage fiascoes.
Here’s what Bloomberg News reported about the Moynihan-White House axis last May when he was the number two at BofA:
“He has been willing to speak out bravely in his industry on the need for reform measures,” says Valerie Jarrett, Obama’s liaison to corporate America who has met with Moynihan at the White House several times. “And he has been willing to come to Washington and roll up his sleeves and work on the issue.”
The history between BofA and Democrats goes back years. One highly publicized political scandal linked the bank and Democrats to the subprime mortgage giant Countrywide Financial, which BofA acquired more than two years ago. Countrywide CEO Angelo Mozilo gave preferential below market mortgages to leading Democrats like Connecticut Senator Chris Dodd, the chairman of the Senate Banking Committee. After the disclosure of the mortgage favors, both Dodd and Senator Kent Conrad (D-SD) decided not to run for re-election.
Dodd and other Washington Democrats belonged to a group of VIP loan recipients known in company documents and emails as “FOAs” — Friends of Angelo, a reference to Angelo Mozilo.
“This (type of loan) isn’t something that’s generally offered to the general public, but it looks like it is something of a sweetheart deal,” observes Boehm about the new BofA credit line to the DNC. “Usually when you see this it is banks with a relationship with candidates and we see that all over the place. We saw that with Countrywide,” he told Pajamas Media.
Allowing third parties access to donor mailing lists as part of financial transactions can be tricky business. For years Democratic activists hounded Republican Sen. John Ashcroft about the third party use of his mailing list. The Federal Election Commission fined his campaign $37,000.
The issue may not play well with voters either. Getting an easy line of credit may not sit well with cash-starved small businesses that have sought loans during the bad economy — even when they tried to collateralize it with real, not abstract assets.
The question is, will the DNC come clean and open their books on the transaction?
Update:
Jefferson George, a Bank of America spokesman, responds:
First, the answer to the question raised in the headline – “Did the DNC Get an Illegal Campaign Loan from Bank of America?” – is no. We follow all Federal Election Commission guidelines in our financial transactions with political parties and apply the same underwriting standards to these organizations as we do to any other institutional borrower. We also work closely with outside campaign finance legal experts to structure and document these transactions. These agreements are required to be arms-length transactions, and we are very careful with how we underwrite these loans.
As I mentioned, we have always had relationships with committees that represent political parties on both sides of the aisle. Our banking relationship with the Democratic Party dates back more than 30 years, well before the current administration. We also have provided loans for Republican candidates and committees. For instance, we provided financing for Mitt Romney’s 2008 presidential campaign.
Regarding the loans to the DNC and DCCC, due to client confidentiality obligations, we can’t discuss specific loans publicly beyond what is disclosed by the FEC, and we would refer you to those individual organizations. We can say, however, that collateral for these types of loans may include many things, and donor lists usually are insignificant compared such security measures as blanket liens against all assets, including accounts receivable. This also assumes a client doesn’t have adequate cash flow from the collection of contributions. Other factors in considering a loan include a client’s history with repaying loans on time or ahead of schedule.
Update (5:10 PM PDT):
More from Jefferson:
Thanks for this. Saw the updated story. One clarification, and it was my error: We didn’t provide financing for Romney. Rather, we had — and have — a banking relationship, handling deposits and providing other cash management services. And that relationship is still active.
Update (8:00 PM PDT):
Richard Pollack adds:
The nub of the story is that Bank of America refuses to confirm that an independent appraisal was done for the issuance of two huge loans to the Democrats totaling $32 million. While the bank might wish to invoke confidentiality, in the post-partisan era promised by President Obama, transparency around this particular loan is vital. This is especially true if there are allegations of violations of law.
The scope of the BofA small business loan to the Democrats is breathtaking. According to CNN/Money, in 2009, the bank issued 308 loans to small businesses totaling $17.6 million and in 2010 it issued 185 loans totaling $22.8 million. So the size of the Democrats’ two loans dwarfs all loans to small businesses in each calendar year. I wonder how credit-starved small business owners would feel about these Democrat loans tonight.
In that CNN/Money article, Mr. George was interviewed, saying, “Among those seeking loans, the creditworthiness of many businesses has changed. Cash flow — the most important factor — often is down. The value of collateral, such as real estate or equipment, has decreased.”
Mr. George had it right. Collateral is everything. The public has a right to know what is the collateral behind the $32 million in loans. Otherwise, it can be regarded as a gift, and patently illegal under federal campaign finance laws.
(Update: 7:54 AM PDT, 10/28):
More from Jefferson:
Your last update at 8:00 pm ET is incorrect. The numbers you cite from the CNN/Money story are for SBA loans. That was clearly stated in the story, and SBA lending is a very small percentage of Bank of America’s total lending to small businesses. In 2009, Bank of America loaned $16.5 billion to small businesses. Through the third quarter of 2010, Bank of America loaned $13.9 billion to small businesses.
Beyond direct lending, Bank of America works with Community Development Financial Institutions (CDFIs) to provide financing and technical assistance to businesses that don’t qualify for traditional financing. As the leading financial institution supporting CDFIs, the bank provides $1 billion of capital – including more than $200 million to CDFIs that finance small businesses in lower-income communities. Bank of America also recently launched a grant program for CDFIs and other nonprofit lenders, aimed at unlocking $100 million in low-cost, long-term capital for small and rural businesses. To date, the bank has awarded grants that allowed CDFIs to access nearly $27.5 million in lending capital.
In addition, Bank of America has made a commitment to increase spending with small, medium-sized and diverse businesses. The bank’s pledge to purchase $10 billion in products and services from those suppliers over the next five years will provide much-needed income for those businesses. Finally, Bank of America recently announced it will hire more than 1,000 Small Business Bankers by early 2012. Based in communities across the U.S., these bankers will consult with small business owners, spend time at their offices and assess their companies’ deposit, credit and cash management needs.
(Update:7:56 AM PDT, 10/28): Richard Pollock responds:
Thank you for your additional comments on behalf of Bank of America. We will post them in full.
As for the substance of your comments:
Actually, I understated the case in your favor by citing the CNN/Money figures. These loans are not to your smallest business customers, which are really hurting in the credit crunch. It’s your biggest SBA (7) loan portfolio, which is the government backed loan program for small businesses through the Small Business Administration.
Your $32 million dwarfs those loans, many of which have been in trouble because of deterioration in collateralized assets. Your former CEO, Ken Lewis, has admitted this repeatedly. That’s why more conservative rules need to be applied in this economic downturn, not more relaxed standards. The Democratic National Committee and the DCCC will continue. No doubt. But its indebtedness after its most expensive and probably losing mid-term election cycle may put it in a precarious state until the presidential campaign. If may twist on an old financial cautionary warning: past performance is not a guarantee of future results. In 2010, the DNC and the DCCC may face substantial indebtedness and will have to repay the loan through 2012 as well as re-build their donor base.
I strongly recommend that your urge your clients, the DNC and DCCC, to be transparent and back up the collateral for their $32 million lines of credit. Failure to do so will only give the public the impression that there was a sweetheart deal here, and perhaps even the appearance of unlawful activity as well.
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