RALEIGH — In one of the least surprising business stories in months, Charlotte-based Bank of American has announced plans for a massive outlay of $750 billion over the next 10 years in investments and loans aimed at lower-income families and neighborhoods. It will also boost its charitable giving by 40 percent.
I wish I could say this was commendable. I wish I could say this was evidence of the free market in operation, with responsible businesses finding opportunities both to do well and to do good. Unfortunately, the Bank of America announcement means nothing of the sort.
It is merely another in a long line of payoffs to a legal protection racket. And it will long be a disappointment to me that former Sen. Phil Gramm of Texas, who once chaired the relevant committee on Capitol Hill and understood the issue clearly, was never able to end these shakedowns by reforming the relevant federal statutes and policies.
As you may remember, Bank of America announced plans back in October to purchase FleetBoston bank in one of the largest corporate acquisitions in history. Next week, hearings on the deal are scheduled before the Federal Reserve Board, which as a regulatory body must approve the proposed merger. Activists in New England and around the country where either FleetBoston or Bank of America has operations had been planning to oppose the merger unless the banks offered cash on the barrelhead (not to the activists personally, but sometimes to their organizations and always to the folks they claim to represent). So the timing of the Bank of America announcement is no coincidence. It’s the start of a process to determine how much protection money the bank will have to pay to conduct its business as it sees fit.
This has been going on for decades now, as interest groups have extorted money out of financial institutions either through the lever of the federal Community Reinvestment Act or the option of pressuring regulators to block mergers and acquisitions. Many of NCNB’s earlier mergers, ones changing it first into NationsBank and then later resulting in the Bank of America takeover, were characterized by such protection deals, in which the bank either had to meet certain lending or investment quotas or actually compensate independent groups to help “pre-qualify” borrowers for loans.
You may think my use of such terms as “extortion” and “protection racket” is extreme, but I personally consider the situation outrageous and dangerous. After all, Bank of America is being coerced to invest or loan in ways that it would not have chosen to do if the test was simply the best rate of return available to its depositors and shareholders. Inevitably, then, the bank is rerouting money in ways it knows will result in higher and more costly defaults and lower rates of return. So special-interest groups, using the threat of governmental power, are forcing Bank of America to transfer financial assets from their owners to someone else. What would you call it?
Nor am I persuaded that this quasi-criminal enterprise is just payback for all the illegal and unethical discrimination that financial institutions such as Bank of America engage in. The evidence for widespread racial animus and redlining in today’s financial sector is shaky at best, as it is based on mythology, misleading statistics, and a faulty definition of the problem (racial disparities in the default rate on loans, not the rejection rate, would be evidence of discrimination, but such disparities either can’t be found or suggest a contrary conclusion). More generally, the most implacable enemy against such misbehavior is competitive capitalism, not government regulation. When a business practices racial discrimination, it must by definition reduce its profitability by overlooking valuable workers, suppliers, and customers.
Sen. Gramm tried during his tenure on the Senate Banking Committee to reform the Community Reinvestment Act and other policies setting up the racket, but he was unable to do so. At least he tried, but I can’t help wishing that he had tried harder and gotten more help. Instead, the shakedowns will continue.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.